What is bonus pay?
We do get asked, but the answer is not always simple. So here goes...
A bonus is a supplemental wage given to an employee above and beyond their "regular" pay, and typically as an award or gift.
Here I'll explain what kind of bonuses employees can receive, along with examples.
To start, understand bonuses come in two flavors...
- Discretionary ( Based on the employer's sole discretion )
- Non-Discretionary ( Based on the employer's agreements or expectations ).
Discretionary bonus
These bonuses are up to you as an employer. They are not included in the regular rate of pay for overtime calculation. Examples include...
- Spot bonus: As a reward for going above and beyond
- Holiday bonus: As a thank you at holiday time
- Employee-of-the-month bonus: As a special recognition
Non-discretionary bonus
These bonuses are based on performance, output, or an agreement between you and the employee. They must be included in the regular rate of pay for overtime calculation. Examples include...
- Production bonus: As a reward for meeting specific targets/goals/quotas
- Attendance bonus: As a reward for perfect attendance or safety standards
- Sign-on bonus: As an incentive for employment
And yes, a non-discretionary bonus can impact overtime calculations because they must be included in the regular rate of pay.
And according to the FLSA, overtime is 1.5 the regular rate of pay for any minute over 40 hours in a workweek.
This means if a non-discretionary bonus is earned during a workweek (where overtime is worked), the bonus must be factored into the regular rate of pay.
When calculated correctly, the employee will be compensated fairly for their overtime.
Non-discretionary bonus with overtime example...
An employee works 44 hours in a week at $20/hour and earns a $500 non-discretionary bonus.
Regular rate of pay = (Total weekly earnings, including bonus) ÷ Total hours worked.
$880 (regular pay) + $500 (bonus) = $1,380 total earnings.
$1,380 ÷ 44 hours = $31.36 regular rate of pay.
Overtime pay = Regular rate × 1.5 × Overtime hours.
$31.36 × 1.5 × 4 = $188.16 overtime pay.