We outlined the flurry of Opinion Letters that the Department of Labor (DOL) recently issued, but an important topic in one of those letters deserves a deeper dive: the requirement that employers include so-called “non-discretionary” bonus compensation in overtime pay calculations under the Fair Labor Standards Act (FLSA). Specifically, the DOL’s January 2026 Opinion Letter reminds us that this oft-overlooked calculation is critical to ensuring FLSA compliance. Let’s revisit the mechanics of properly paying non-discretionary bonus income to non-exempt employees.
The Regular Rate of Pay Is Not Necessarily Just the Base Hourly Wage
Step one is determining the “regular rate of pay.” Employers often get tripped up here by assuming the “regular rate” just refers to the base hourly wage earned for each hour worked. Not necessarily. The regular rate includes all remuneration for employment, with limited exceptions. Thus, the regular rate must include non-discretionary bonus compensation. (And as we’ve previously covered, the regular rate must also include other forms of non-discretionary income, like shift differentials and commissions, but today we are focused on bonuses.)
Non-Discretionary Bonus Compensation Is Typically Based on Predetermined Criteria
That begs the question, what is a non-discretionary bonus? The FLSA more clearly specifies what it isnot. As the DOL Opinion Letter explains, the FLSA requires that three conditions be met for a payment to be an excludable discretionary bonus: (1) the employer must determine the fact and amount of the payment in its sole discretion; (2) that determination must occur close to the end of the period when employees receiving the payment performed their work; and (3) the payment must not be made under any prior contract, agreement, or promise causing the employee to expect such payments regularly. Bonuses that do not meet these three elements are non-discretionary.
Typically, that means non-discretionary bonus compensation is based on criteria or formulas communicated in advance. The DOL Opinion Letter, for example, addressed an incentive program that used criteria and formulas to reward “punctuality, attendance, consistency in completing daily safety tasks, driving safety, compliance with traffic laws, proper attire, and performance efficiency.” Although the employer exercised discretion in deciding to offer the bonuses and in setting their terms, the DOL explained that the bonuses were still non-discretionary because they were based on a “predetermined plan to incentivize certain work performance.” Other common examples of non-discretionary bonuses are financial rewards for having good attendance, hitting production metrics, or picking up last-minute or under-staffed shifts.
Calculating the Regular Rate with Non-Discretionary Bonus Compensation
Now that you know your non-discretionary bonus compensation, you can calculate the regular rate of pay including it. To do so, take the total amount of straight-time wages paid to an employee in a workweek and divide by the total hours worked by that employee in that workweek.
For example, in the DOL Letter, an employee worked 50 hours in the workweek, earned $12.00 as a base hourly wage, and received $9.50 per hour in non-discretionary bonus compensation based on the “safety, job duties, and performance” bonus plan described above. The regular rate was therefore $21.50, as outlined below.
Calculating the Overtime Premium
After determining the regular rate, calculate the overtime premium owed by dividing the regular rate in half (resulting in the so-called “half-time” rate) and multiplying that amount by the overtime hours worked to obtain the overtime premium pay due for the workweek. Using the example in the DOL Opinion Letter, and bringing it all together:
| DOL Opinion Letter Example | |
| Category | Calculation |
| Base Wages | $12.00 x 50 hours = $600 |
| Non-Discretionary Bonus Compensation | $9.50 x 50 hours = $475 |
| Total Straight-Time Wages Paid | $600 + $475 = $1,075 |
| Regular Rate | $1,075/50 hours worked = $21.50 per hour |
| Half-Time Rate | $21.50/2 = $10.75 |
| Overtime Premium Pay Owed | $10.75 half-time rate x 10 hours overtime worked = $107.50 |
| Total Compensation Owed | $1,075 + $107.50 = $1,182.50 |
A Final Note on Timing
The above example assumes the non-discretionary bonus relates to an employee’s work performed in a single workweek. But often, employers structure bonuses to be paid based on an employee’s work over a quarterly or monthly (or some other) period. For example, if a non-discretionary attendance bonus to be paid in March requires perfect attendance in February, the attendance bonus should be incorporated into the regular rate calculation for the hours worked in the month of February (not in the week in March in which the bonus is paid).
Conclusion
A few key takeaways for employers:
- Non-discretionary bonuses must be included in the regular rate. The regular rate is not the same as the base hourly wage when an employee receives non-discretionary bonuses.
- In turn, the regular rate drives the calculation for overtime premiums owed.
- This calculation may require a backwards look at the overtime hours worked during the timeframe (e.g., pay period, month, quarter, etc.) to which the bonus payment relates.
- Just because an employer has discretion to provide and define a bonus in the first place does not mean the bonus is discretionary under the FLSA.
Depending on the number of employees impacted and the amount of the bonuses paid, the failure to incorporate non-discretionary bonuses into the regular rate for purposes of calculating overtime premiums can result in significant unpaid overtime premiums. And this potential “miss” is certainly on the plaintiff bar’s radar. Let the DOL’s January 2026 Opinion Letter be a friendly reminder to check that you have this house in order before any quarter one bonus payouts.
