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Do You Need to Include Bonuses In Your Overtime Pay Calculations?

April 06, 2023

Written by Complete Payroll

Do You Need to Include Bonuses In Your Overtime Pay Calculations?

Calculating overtime pay sounds simple enough, but it is an essential task that requires accuracy and compliance with state and federal laws. 

The calculation is straightforward:

Overtime pay = the employee’s regular rate of pay x 1.5 x overtime hours worked. 

But what about bonuses? How do those affect overtime pay calculations? 

These are great questions, and they are a great illustration of why many companies choose to work with a payroll specialist to make sure that they successfully abide by all state and federal laws related to employee compensation. 

What must be included in your overtime compensation calculations?

Nondiscretionary bonuses must be included in the overtime compensation calculations for your company. However, discretionary bonuses are usually excluded. 

What is a nondiscretionary bonus? 

A nondiscretionary bonus is one that the employer must pay. There is no way to “opt out” of a nondiscretionary bonus. 

The Department of Labor (DOL) provides this list of examples of nondiscretionary bonuses: 

  • Bonuses based on a predetermined formula, such as individual or group production bonuses;
  • Bonuses for quality and accuracy of work; 
  • Bonuses announced to employees to induce them to work more efficiently;
  • Attendance bonuses; and
  • Safety bonuses (i.e., number of days without safety incidents).

Additional nondiscretionary bonuses would include anniversary bonuses for years served and bonuses for working unpopular or undesirable shifts. 

 

What is a discretionary bonus? 

These bonuses are included in the employee’s base pay for their overtime pay equation.

The DOL requires the following four conditions to be met:

  • The employer has the sole discretion, until at or near the end of the period that corresponds to the bonus, to determine whether to pay the bonus;
  • The employer has the sole discretion, until at or near the end of the period that corresponds to the bonus, to determine the amount of the bonus; and
  • The bonus payment is not made according to any prior contract, agreement, or promise causing an employee to expect such payments regularly. 

According to FLSA 29 CFR § 778.208-215, discretionary bonuses are not overtime-eligible. 

An employer’s actions could cause bonuses that were previously categorized as such. For example, if an employer shares in advance that there will be a holiday bonus this year, that bonus is going to be recategorized as nondiscretionary, as it has been promised. 

Additional exemptions to overtime calculations may include any contributions the employer makes to a bona fide profit-sharing plan, trust, thrift, or savings plan. 

What Changed in 2020?

Effective January 15, 2020, the FLSA was updated to reflect a new definition of “regular rate.” 

This change allows bonus calculations to exclude some sign-on and longevity bonuses. 

You can find more information about calculating overtime bonuses in 29 CFR § 778.209.

How to Get Help with Payroll Processing

Complete Payroll offers comprehensive payroll services that meet your business’s needs. Our goal is to ensure that your employees are paid accurately and on time – and to make sure that you can focus on running your business instead of getting bogged down in payroll processes, taxes, and paper trails! 

Take a look at our payroll services to learn more about how we can help you with all the tasks related to getting your team paid!  

DISCLAIMER: The information provided herein does not constitute the provision of legal advice, tax advice, accounting services or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional legal, tax, accounting, or other professional advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation and for your particular state(s) of operation.

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