Bonuses paid or gifts given to non-exempt employees (those entitled to overtime wages for working hours in excess of 40 per week) at the end of the year or during the holidays can, in certain circumstances, trigger the overtime calculation provisions of the Fair Labor Standards Act (FLSA). The important factor is whether the bonus is discretionary or non-discretionary.

A non-discretionary bonus is one that is agreed to or promised in advance – including a bonus paid for production levels, attendance, or as guaranteed in a collective bargaining agreement – and must be included in in an employee’s regular rate used for determining overtime pay. Non-discretionary bonuses also can include holiday bonuses paid at the same time each year and relied upon by the employees. The determination of whether or not a bonus falls within the non-discretionary designation is fact specific and should be discussed with the company’s human resource or legal counsel before deciding if and when to pay the bonus.

If a holiday or year-end bonus is found to be non-discretionary, the bonus amount must be apportioned back into the workweeks in which it was earned so that the employer can re-calculate any additional overtime pay due to an employee for the period covered by the bonus. FLSA regulations require that overtime must be paid at the time it is earned. However, in the case of a bonus that is deferred for longer than a week, the regulations also provide that employers may disregard the bonus in computing the regular hourly rate for a particular week until the bonus amount for the workweek can be ascertained. Once the bonus amount is ascertained, that amount must be apportioned back over the workweeks of the period during which it may be said to have been earned and paid out (for example, a year-end bonus that may encompass the entire work year).

On the other hand, a discretionary bonus is generally a payment that an employee does not have reason to expect; such bonus is made at the sole discretion of the employer, and is not included in overtime calculations. Such bonus is not related to any contract, promise or agreement to pay the amount, and is not in response to some expectation based upon prior payment of such bonus. Those amounts do not have to be added into an employee’s wages for purposes of calculating the “regular rate” of pay on which overtime is based.

The regulations governing the calculation of overtime payments after a non-discretionary bonus payment are quite detailed and complex. Therefore, employers who pay year-end/holiday bonuses should be prepared to support the position that a bonus is discretionary, or should be knowledgeable about the methods for adding bonus amounts back into an employee’s regular rate of pay for the purpose of calculating overtime for the year.