Cracking the code: Adding bonuses to FLSA overtime calculations

The Fair Labor Standards Act (FLSA) requires employers to pay overtime to nonexempt employees based on their regular pay rate and the number of hours worked in a workweek. While this sounds straightforward on paper, employers commonly fail to realize that nondiscretionary bonus payments must be included in calculating the regular pay rate and, ultimately, the amount of overtime owed. Arizona hasn’t codified an overtime statute, so Arizona employers must look to the FLSA for overtime compliance. How can employers that pay nondiscretionary bonuses properly calculate the regular pay rate for overtime purposes?

When is a bonus factored into the regular pay rate?

The FLSA distinguishes between discretionary and nondiscretionary bonuses when determining whether the bonus should be included in an employee’s regular pay rate. A discretionary bonus is essentially any bonus that isn’t guaranteed, based on performance, or expected by the employee. A discretionary bonus is excludable from the regular pay rate.

Any bonus that doesn’t fit within all the statutory requirements of a discretionary bonus is considered a nondiscretionary bonus. Nondiscretionary bonuses include:

• Attendance bonuses;
• Productivity bonuses;
• Safety bonuses; and
• Bonuses made as part of a contract.

Additionally, commissions, incentive pay, or perfect attendance awards are considered bonuses. Nondiscretionary bonuses must be included in the regular pay rate.

Calculating regular pay rate when paying nondiscretionary bonuses