employee calculating regular rate of pay

As a general matter, employees who are covered by the Fair Labor Standard Act’s (FLSA’s) overtime provisions must be paid time and a half for all hours worked over 40 during a week. That means non-exempt workers are entitled to be paid one and a half times their regular rate of pay for overtime hours. However, many employers fail to correctly calculate what the “regular rate of pay” is, resulting in workers getting shorted on their overtime pay. Employees are often unsure what impact a bonus should have on their regular pay rate, and consequently on their overtime rate. The Lore Law Firm takes a look at these rules and how they may affect your right to be paid fairly.

What Is a “Regular Rate of Pay”?

According to the FLSA, an employee’s regular rate of pay includes “all remuneration for employment paid to, or on behalf of, the employee,” minus any statutory exceptions that may apply. To calculate a regular pay rate, the worker’s pay for the week should first be added up along with all other earnings. Then, that dollar figure should be divided by the number of hours the employee worked during that week.

The statutory exceptions mentioned above cover forms of payment that are not required to be included in the worker’s regular pay rate, including:

  • Gifts and similar payments
  • Payments when no work is performed (for example, due to vacation, holidays, or illness); reimbursable business expenses; and similar payments
  • Payments under a profit-sharing plan
  • Employer contributions to employee benefit plans
  • Premium payments for non-FLSA overtime
  • Income derived from employer stock options (within certain limits)
  • Discretionary bonuses

The last item, discretionary bonuses, tends to cause confusion among employers and employees alike. The question often arises whether a bonus is discretionary (and can be excluded from the regular pay rate calculation) or non-discretionary (and must be included).

What Makes a Bonus Discretionary?

To answer the question of how to properly categorize bonuses, the FLSA sets forth the following guidelines. If all of the following are met, the bonus is discretionary:

  • The employer alone has the discretion to determine whether to pay the bonus, until at or close to the end of the period corresponding to the bonus;
  • The employer alone has the discretion to determine the amount of the bonus to be paid during that same period; and
  • The bonus is not paid pursuant to any previously existing contract, agreement, or promise which would cause the employee to expect such bonuses on a regular basis

Conversely, bonuses which are intended to drive or increase employee productivity are likely not discretionary. For example, many employers have bonus programs based on quotas or efficiency. These are usually announced ahead of time to drive production or sales by inducing the employee to work harder or more efficiently.

Examples of Discretionary vs. Non-discretionary Bonuses

To make the distinction even clearer, the Department of Labor has a fact sheet with common examples of discretionary and non-discretionary bonuses:

Discretionary bonuses (excluded from an employee’s regular pay rate):

  • Paid for overcoming a challenging or difficult situation
  • Paid to workers who made unique or extraordinary efforts that are not otherwise awarded according to employer guidelines
  • Employee-of-the-month bonuses
  • Severance bonuses
  • Referral bonuses (paid to workers who are not primarily engaged in company recruiting efforts)

Non-discretionary bonuses (must be included in an employee’s regular rate of pay):

  • Based on a preset formula, e.g. individual or group production bonuses
  • Awarded for accuracy and quality of work performed
  • Announced to employees ahead of time to encourage them to work harder or better
  • Attendance bonuses
  • Shift differentials 
  • Safety bonuses (paid when a number of days are worked without safety problems)

If you’ve been paid bonuses or shift differentials and are unsure whether these amounts were correctly factored into your overtime rate, you should contact us because the answer could make a substantial difference in how much compensation you are entitled to. If you’d like to learn more about bonuses, regular rates of pay, and overtime pay, The Lore Law Firm can help. Reach out to us today.

Michael Lore is the founder of The Lore Law Firm. For over 25 years, his law practice and experience extend from representing individuals in all aspects of labor & employment law, with a concentration in class and collective actions seeking to recover unpaid back overtime wages, to matters involving executive severance negotiations, non-compete provisions and serious personal injury (work and non-work related). He has handled matters both in the state and federal courts nationwide as well as via related administrative agencies. If you have any questions about this article, you can contact Michael by using our chat functionality.