December 01, 2025
Don’t Let Your Holiday Bonus Bite Back
‘Tis the season! It is a time when many employers give some or all employees a bonus. It’s also the time of year that I tell story after story about how these well-intended payments go awry.
Good intentions are great until they’re not. It’s great until someone suggests that you violated the Fair Labor Standards Act (FLSA). How? Depending upon the type of bonus you gave your employees, the value of that bonus must be included in each employee’s regular rate of pay for overtime calculations. Wait, what?!
EX: Let’s say you have an incentive-based pay or pay-for-performance program. You announce that if any non-exempt employee meets a minimum threshold in a quarter, such as meeting a sales or performance goal, you will give the employee a flat $500 bonus. Your employee reads your announcement, meets the goal (after working some overtime in that quarter), and you pay the bonus. Great, but you’re not finished. This is likely a non-discretionary bonus, meaning you do NOT have the discretion to exclude it from the employee’s regular rate of pay for overtime calculations. You must add the value of the bonus to the total wages you paid the employee in that quarter, then divide that figure by the total hours worked by the employee. The result gives you that employee’s regular rate of pay for that quarter. That is the rate you must use to calculate the overtime you should have paid the employee in the quarter covered by the bonus.
This retroactive calculation and payment are enough of an administrative burden that some employers decide to forego this type of bonus payment for a discretionary bonus. The latter need not be included in the regular rate for overtime calculations. The downside is discretionary bonuses are usually not based on employee performance. It is often the same amount for everyone, regardless of effort or outcomes. That leaves some of our shining stars feeling a tad disgruntled.
For more information, read the U.S. DOL’s Fact Sheet 56C, “Bonuses Under the Fair Labor Standards Act” and consult with our company’s employment counsel.
