Under the FLSA, bonuses are excludable from the regular rate only if the employer can affirmatively demonstrate that the bonus fits into a specific statutory exclusion. In order for a bonus payment to be excluded it must be discretionary, which requires that the bonus meet all of the following requirements:

  1. The employer must retain discretion as to whether the payment will be made;
  2. The employer must retain discretion as to the amount of the payment;
  3. The employer must retain discretion as to the payment of the bonus until near the end of the period which it covers; and
  4. The bonus must not be paid pursuant to any prior contract, agreement or promise causing the employee to expect such bonus payments.

Under this test, bonuses that are announced to employees to induce them to work more steadily, rapidly or efficiently, or to remain with the employer, must be included in compensation. Similarly, bonuses which are intended to reward specific behavior, such as attendance bonuses, individual or group productivity bonuses, bonuses for quality and accuracy of work, bonuses conditioned upon continued employment, or bonuses “promised to employees upon hiring” must be included as compensation.

A bonus paid pursuant to any prior “contract, agreement or promise” is not excluded. Bonuses that are not discretionary must be totaled in with other earnings and used to determine the hourly rate on which overtime is based.

For example, if a company provides a plan whereby employees will share monies in the event that company performance reaches certain goals, that bonus income will affect the regular rate/overtime computation for non-exempt employees. Such a Plan does not provide the requisite discretion to meet the regulatory requirements. There is no explicit reservation of discretion concerning the giving of the bonus.

Rather, it is contingent upon the level of Company performance and the level of individual performance. The Company performance contingency relates to sales and expenses; the employee performance contingency relates to an objective/subjective assessment of performance. Under the FLSA regulatory framework, such contingencies do not establish the requisite discretion to permit exclusion from the computation of the regular rate for overtime purposes.

This may not seem like a big deal, but if the DOL uncovers this relatively minor violation (depending on the amounts involved), it may be more inclined to dig deeper into the employer’s compensation practices and possibly find other more significant violations that were lurking beneath the surface. If the employer, however, builds into the bonus program the retention of some element of discretion, this may yet be a way to avoid the inclusion of the bonus into the regular rates of employee wages, with the accompanying extra overtime required to be paid.