Determining when a bonus is discretionary or nondiscretionary under the FLSA

Many companies annually prepare business goals and establish incentives for employees if the goals are met. One common incentive is the quarterly or annual bonus. While the reward process seems straightforward, it can come with unexpected obligations and complicated calculations under the Fair Labor Standards Act (FLSA). Last month, we focused on how to properly include a nondiscretionary bonus amount in an employee’s regular pay rate for purposes of properly calculating overtime pay and how to do so when bonus was paid less frequently than on a weekly basis (see “DOL turns up the heat after ICE raid”). Let’s take a closer look at exactly which bonuses must be included when you're making the calculations.

Discretionary vs. nondiscretionary bonuses

Many employers view bonuses as extra payments to employees they aren’t obligated to provide. Accordingly, they don’t think about the potential FLSA implications.

When an employee works overtime in a given week, the FLSA requires the overtime rate to be calculated based on the regular pay rate, which includes with a few notable exceptions any and all compensation paid to an employee in a particular workweek, not just the hourly wage. Whether bonuses paid to employees must be included in the regular rate calculation turns on whether the bonuses are discretionary or nondiscretionary.