Under the Fair Labor Standards Act ("FLSA") bonuses will be excludable from the regular rate only if the employer can affirmatively demonstrate that the bonus fits into a specific statutory exclusion.

29 USC 207(e)(3) excludes discretionary bonuses from compensation. In order for a bonus payment to be deemed discretionary, all of the following requirements must be met:

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.

29 CFR 778.211.

Bonuses which are announced to employees, for example, to induce them to work more steadily, rapidly or efficiently, or to remain with the employer, must be included in compensation. 29 CFR 778.211. In addition, 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. Id. In this regard, a bonus paid pursuant to any prior "contract, agreement or promise" is not excludable. 29 CFR 778.211(c). Bonuses which are not discretionary must be totaled in with other earnings and used to determine the hourly rate on which overtime is based. 29 CFR 778.108.

For example, in a union contract situation, when employees are given a signing bonus for agreeing to a new labor contract, such a signing bonus would have to be included in the regular rate, with the result of increasing overtime expenditures. This is because, first, the FLSA regulations specifically include signing bonuses as those which are includable.  Second, if the bonus would also be considered as one given pursuant to a "contract, agreement or promise" and one which is expected.

There may be, however, a method by which a Company may avoid the requirement for inclusion of the signing bonus in the regular rate.  In Minizza v. Stone Container Corporation, 842 F.2d 1456 (3d Cir.), cert. denied, 488 U.S. 909 (1988) the Third Circuit ruled that union contract ratification bonuses could be excluded under Section 7(e)(2) from employee regular rates, notwithstanding the facts that the bonuses were incorporated in a labor contract between the parties and mandated that employees be employed for three months to receive the first bonus and six months to receive the second. The Court found that because these payments were an inducement for ratification of the collective bargaining agreement, negotiated as a trade-off for wage increases and unrelated to hours of employment or service, they fell within the exclusion of 29 USC 207(e)(2), which excludes from the regular rates, inter alia, payments to an employee which "are not made as compensation for his hours of employment."

Thus, if the bonus was deemed to be an incentive for accepting employment, structured to not be dependent, in any manner, upon a designated number of hours worked and there was evidence (i.e. the policy) reflecting that the bonuses were being given in "exchange" for the setting of a lower wage rate, the Company may be able to bring the bonuses within the "safe harbor" provided by Minizza.

The simple rule is that employers must always be aware that if they promise employees a bonus, whether through a policy (e.g. perfect attendance bonus) or in some other manner, their overtime outlays will be increased.