DOL dispels misconception about performance-based bonus plans

Performance-based bonus plans can motivate employees to work harder—if the employee does X, the employer promises to give the employee Y bonus. Sounds like a win-win, right? But there is a catch. Generally, performance-based bonuses paid to nonexempt employees in accordance with a predetermined plan need to be included in the regular rate for the purpose of calculating overtime under the Fair Labor Standards Act (FLSA).

Confusion about discretionary bonus exception

Most employers know that the FLSA requires them to pay nonexempt employees “at a rate not less than one and one-half times the regular rate at which [the employee] is employed” for “all hours worked over 40 hours in a workweek.” The confusion comes in with the calculation of the “regular rate,” which should include “all remuneration for employment paid to, or on behalf of, the employee,” with a few specific enumerated exceptions.

Part of that confusion is a common misconception that performance-based bonus plans fall within the “discretionary bonus” exception because the employer may retain some discretion over whether the employee meets the bonus eligibility criteria.

DOL addresses confusion in recent opinion letter

Recently, the U.S. Department of Labor (DOL) dispelled this misconception and warned employers against this approach. In an opinion letter issued on January 5, 2026, the DOL explained there are three elements of a discretionary bonus: