DOL Opinion Letter Provides Refresher On Discretionary Bonuses And Overtime Calculations

The Department of Labor (DOL) started off 2026 with a bang. On January 5, 2026, the Administrator of the DOL Wage and Hour Division issued six opinion letters covering a variety of topics related to the Fair Labor Standards Act (FLSA) and the Family Medical Leave Act. Among them was Opinion FLSA2026-2, which provided an important refresher on how to calculate overtime premiums due to nonexempt employees under the FLSA who work more than 40 hours in a week.

Section 7 of the FLSA requires employers to pay covered employees a premium rate of "not less than one and one-half times the regular rate at which [the employee is employed" for each hour in excess of forty hours worked in a workweek. 29 U.S.C. § 207(a)(1). Therefore, in order to determine an employee's overtime premium pay, an employer must calculate the employee's "regular rate," which includes "all remuneration for employment paid to, or on behalf of, the employee" during a workweek, unless the payments fall within certain statutory exemptions. 29 U.S.C. § 207(e). As detailed in the Opinion letter, an employee's regular rate is calculated by adding together all of the remuneration actually paid to the employee during a workweek (minus statutory exemptions) and dividing it by the actual hours worked during the workweek. Opinion FLSA2026-2 discusses one of the FLSA's most prominent exemptions to payments included in the "regular rate," often called the "discretionary bonus" exemption. 29 U.S.C. § 207(e)(3).

Opinion FLSA2026-2 addresses whether bonuses paid pursuant to an employer's "Safety, Job Duties, and Performance" bonus plan must be included when calculating an employee's regular rate. The bonus plan offered employees, typically paid $12 per hour, increases in their hourly rate if they hit certain productivity, attendance, safety or compliance metrics, with the maximum bonus topping out at an additional $9.50 per hour. According to the Opinion, the employer may not exclude these bonus payments from an employee's regular rate and overtime calculations because the payments failed to meet at least two of three conditions needed to qualify as an exempt discretionary bonus. The payments were not discretionary bonuses because entitlement to and the amount of the payments were not "determined at the sole discretion of the employer," and the employer's determination about bonus entitlement and amount were not made "at or near the end of the period." Rather, the bonus plan set out the terms of an employee's entitlement to bonus payments in advance of the performance period. The Opinion did not address whether the payments met the third criteria, that the payment is not made "pursuant to any prior contract, agreement or promise causing the employee to except such payments regularly," because an exempt discretionary bonus must meet all three criteria to qualify.

Since the bonus payments were not excludable from an employee's regular rate, the Opinion stated that the employer must include the payments in the calculation of an employee's overtime premium rate. Accordingly, in a workweek where an employee worked 50 hours and earned the highest possible bonus ($12 base rate plus $9.50 per hour), the employee's regular rate would be $21.50 per hour, such that the employee would be entitled to $32.25 for the ten overtime hours worked. If the employer did not count the bonuses payments in its overtime calculations, the employer would have significantly underpaid the employee, resulting in liability under the FLSA. Employers and their counsel should pay close attention to the Opinion and check payroll practices to ensure regular rates and overtime premiums are calculated correctly.

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