What is a nondiscretionary bonus?

Any bonus promised in advance tied to performance or policy that employees expect regularly. These must be included in the regular rate calculations.

Can discretionary bonuses be excluded from overtime calculations?

Yes, if truly at employer’s sole discretion, not promised or expected.

What if the bonus spans multiple weeks?

Allocate the bonus across the weeks it covers, then recalculate weekly regular rates.

Are there state‑specific rules to be aware of?

Yes. For example, Illinois enforces inclusion of nondiscretionary bonuses in overtime calculations. Always confirm your state and local labor laws.

September 09, 2025 in Payroll

How to Calculate Overtime When Bonuses Are Involved

By: Danielle Levine

Overtime pay for nonexempt employees can be more complicated than multiplying hours by wage. When bonuses are involved, they may alter the employee’s regular rate under the FLSA. Misclassifying bonuses may lead to compliance risks and employee disputes, so understanding how to factor them into overtime is essential.

Bonus Types and Overtime Treatment
How to Calculate Overtime When Bonuses are Included
Example Overtime With Bonuses Calculation
Why This Is a Risk for Employers
Best Practices Checklist
Frequently Asked Questions (FAQs)

Bonus Types and Overtime Treatment

Discretionary Bonuses

Paid at the employer’s sole discretion. No promise or prior notice. Examples include holiday gifts, spontaneous awards, employee‑of‑the‑month, and seniority gifts. These do not impact the regular rate under the FLSA, and thus are excluded from overtime calculations.

Nondiscretionary Bonuses

Promised in advance, based on performance, attendance, company policy, or work quality. These bonuses create employee expectations and must be included in the regular rate when calculating overtime.

Examples:

Production quotas
Attendance rewards
Performance review bonuses
Service anniversary awards

How to Calculate Overtime When Nondiscretionary Bonuses are Included

If the bonus covers a single workweek:

Add the bonus to the employee's total wages for that week.
Divide the total by the number of hours worked to get the new regular rate.
Calculate overtime pay with this rate.

If the bonus spans multiple weeks:

The bonus amount must be divided among the work weeks it applies to and factored into each week's regular rate before determining overtime.

Percentage‑of‑earnings bonuses

If a nondiscretionary bonus is calculated as a percentage of total earnings, including both straight and overtime wages, it may already account for overtime. In this case, employers might not need a supplemental overtime calculation because the bonus effectively increases the regular rate for all hours worked. This only applies if the bonus formula explicitly includes overtime pay. If overtime pay is not included in the calculation, employers must factor in the bonus when computing overtime separately.

Example Overtime With Bonuses Calculation

Jane earns $16/hour, works 44 hours in a week and receives a promised $100 production bonus:

Straight‐time wages = $16 × 44 = $704
Total compensation = $704 + $100 = $804
New regular rate = $804 ÷ 44 = $18.27
Half‑time premium = $18.27 × 0.5 = $9.14
Overtime pay = $9.14 × 4 = $36.56
Total pay = $804 + $36.56 = $840.56

Why This Is a Risk for Employers

Many employers fail to include nondiscretionary bonuses in overtime regular rate calculations, exposing themselves to legal claims and wage‑theft allegations. For example, the Illinois Supreme Court recently held that excluding performance bonuses from overtime violates state law unless they qualify as gifts.

If you believe you have not properly calculated overtime, you’ll need to conduct a thorough review of overtime payments going back at least two years. While the standard time limit for filing an overtime claim is two years, it can extend to three years if the underpayment was found to be intentional.

Best Practices Checklist

Step	Action
1	Identify whether a bonus is discretionary or nondiscretionary
2	Determine the period the bonus covers (single or multiple weeks)
3	Recalculate the regular rate per week, including bonus
4	Apply time‑and‑a‑half to overtime hours
5	Track percentage‑of‐earnings bonus plans that may simplify calculations
6	Periodically audit payroll and bonus practices for accuracy

Final Thoughts

Interested in deeper HR workflow best practices? Check out these helpful resources.

Frequently Asked Questions (FAQs)

What is a nondiscretionary bonus?: Any bonus promised in advance tied to performance or policy that employees expect regularly. These must be included in the regular rate calculations.
Can discretionary bonuses be excluded from overtime calculations?: Yes, if truly at employer’s sole discretion, not promised or expected.
What if the bonus spans multiple weeks?: Allocate the bonus across the weeks it covers, then recalculate weekly regular rates.
Are there state‑specific rules to be aware of?: Yes. For example, Illinois enforces inclusion of nondiscretionary bonuses in overtime calculations. Always confirm your state and local labor laws.

©2025 - Content on this blog is intended to provide helpful, general information. Because laws and regulations evolve, please consult an HR professional or legal expert for guidance specific to your situation.

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