Due to the difficulty employers are facing hiring and retaining employees, many employers have started offering bonuses, such as retention bonuses, to employees. This practice can sometimes lead to unexpected consequences depending on whether the employees receiving the bonus are exempt or non-exempt for purposes of overtime pay laws and whether the bonus is “discretionary” or “nondiscretionary” under the Fair Labor Standards Act (“FLSA”).
Federal law requires all “non-exempt” employees to be paid overtime, or time and one-half their regular rate of pay, for all hours worked over 40 hours in a workweek. In addition, all compensation for hours worked must be included in calculating the non-exempt employee’s regular rate of pay for purposes of determining the amount of overtime owed by the employer.
Exempt employees do not have to be paid overtime. Therefore, the payment of bonuses to exempt employees does not present the same issues as with non-exempt employees.
Whether the overtime pay of a non-exempt employee is impacted due to payment of a bonus depends on whether the bonus is discretionary or non-discretionary under the FLSA.
A bonus is discretionary only if all of the following statutory requirements are 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.
Discretionary bonuses are excludable from the regular rate of pay and do not trigger a requirement to pay additional overtime to the non-exempt employee receiving the discretionary bonus.
A nondiscretionary bonus is a bonus that fails to meet the statutory requirements of a discretionary bonus. Importantly, nondiscretionary bonuses are included in the regular rate of pay, unless they qualify as excludable under another statutory provision.
Because nondiscretionary bonuses are included in the regular rate of pay, they can retroactively raise a non-exempt employee’s regular rate of pay, resulting in additional overtime pay due by the employer. For example, if a non-exempt employee receives a year-end non-discretionary bonus, it must be apportioned back into the workweeks in which it was earned to re-calculate any additional overtime pay that is owed to the employee for the period the bonus covers.
This DOL Fact Sheet explains the criteria for determining whether a bonus is discretionary or nondiscretionary.
Employers are advised to consult with their counsel before issuing bonuses to non-exempt employees in order to determine the impact bonuses could have on their overtime pay obligations to those employees.