This week’s question comes from Sylvia, a payroll manager.

Sylvia asks:

We have employees who worked overtime this past week and received bonuses. Do we need to include bonuses in overtime calculations?

Answer: The bonuses may or may not have to be included in the overtime calculation. Discretionary bonuses are not included in calculating overtime pay, but non-discretionary bonuses are included.

Both the Decision to Pay a Bonus and the Amount of the Bonus Must Be Discretionary

Under 29 USC §207(e)(3)(a), in order for a bonus not to be included:

Both the fact that payment is to be made and the amount of the payment are determined at the sole discretion of the employer at or near the end of the period and not pursuant to any prior contract, agreement, or promise causing the employee to expect such payments regularly.

Regulations Further Clarify the Law

The regulations issued under this section (29 CFR §778.221(b)) expand upon the explanation under the law:

In order for a bonus to qualify for exclusion as a discretionary bonus under [the law stated above] the employer must retain discretion both as to the fact of payment and as to the amount until a time quite close to the end of the period for which the bonus is paid. The sum, if any, to be paid as a bonus is determined by the employer without prior promise or agreement. The employee has no contract right, express or implied, to any amount.

State Laws May Be More Beneficial

State laws may provide rules that are more beneficial to the employee and must be followed. Vision Payroll recommends that employers contact a labor law attorney to ensure that their bonus plans will be considered discretionary if they plan to exclude the bonus from the overtime calculation.