Perhaps the most frequently violated provision of the Fair Labor Standards Act involves employers’ failure to include bonuses or other incentive pay when determining non-exempt employees’ regular rate for purposes of calculating overtime. In order to avoid this calculation and the resulting overtime “bump,” some companies rely on FLSA rules that exclude purely discretionary bonuses from the overtime requirement. In a new opinion letter, the Department of Labor’s Wage and Hour Division (FLSA2026-2) concluded that bonuses intended to incentivize certain employee behaviors must be included in the regular rate even if they are awarded on a discretionary basis.

The letter addressed questions posed by a waste management driver whose employer paid a bonus based on employees’ punctuality, attendance, consistency in completing daily safety tasks, driving safety, compliance with traffic laws, proper attire, and performance efficiency. However, the bonus plan stated that any such payments are paid at the company’s discretion. DOL responded that the described bonus plan failed to meet the requirements for a true discretionary bonus under the FLSA.

In this situation, the bonus is intended to incentivize employees to meet certain performance criteria. If they meet these goals, the bonus becomes payable under the plan. The fact that the employer retains discretion to determine whether the criteria are met and the amount of the payment does not turn it into a purely discretionary bonus. Employees are told in advance of the incentives and anticipate payment if they fulfill these goals.

Qualifying discretionary bonuses cannot be based on incentive goals provided in advance to employees. A classic example of an excludable discretionary payment is a decision to pay a Christmas bonus to employees based on overall company profitability during the prior year. The bonus potential is not announced in advance, and the individual employee awards are not tied to specific performance criteria. Once employers begin using the bonus as an incentive to encourage specific behaviors, it likely must be included in the regular rate of pay when calculating overtime due.

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