Skip to Main Content

Keeping you informed

Overtime Rules Require Addition of Incentive Compensation to Regular Rate

    Client Alerts
  • August 26, 2022

Over the years, we have periodically published EmployNews articles on the impact of bonuses or other incentive compensation on the regular rate used to calculate overtime under the Fair Labor Standards Act (FLSA). Given that this may be the most frequently violated wage rule by employers, it’s worth another refresher on these overtime requirements.

For non-exempt workers, meaning those entitled to overtime, the overtime premium is based on the employee’s “regular rate” for that workweek. If the employee only receives an hourly wage for the week, the calculation is simple: divide the total hourly compensation by 40, with overtime as 1.5 times this rate for each additional hour worked.

However, the calculation becomes more complex if the employee is provided with incentive compensation, such as performance, attendance, or productivity bonuses. Many employers simply pay the bonus and fail to take into account the impact of the incentive compensation on the regular rate. Under FLSA rules, the employer must add the bonus to the wages earned during the period over which it was measured, and recalculate the regular rate taking into account the impact of the additional pay on the overtime rate.

For example, if the employee receives an end-of-the-year performance bonus, that amount must be allocated across each week of the year. For weeks where the employee worked overtime, that share of the bonus must be added to the week’s compensation to recalculate the regular rate. The difference between the amount of overtime paid and the new amount using the higher regular rate must be paid to the employee along with the bonus.

The administrative work required to recalculate overtime pay may be one reason why this rule is so widely ignored. Truly discretionary bonuses, meaning those to which the employee has no expectation as a result of their performance, do not require this recalculation. Some employers use a “percentage of wage” bonus that pays the employee a set percentage of all wages earned over a time period. This method automatically compensates employees for the impact of the bonus on the regular rate and therefore does not require any additional recalculation or payment.