Non Discretionary Bonus – 5 things you need to know

Posted on August 18, 2022

A bonus is considered to be non-discretionary (and must be paid) if the employer (1) promised it and (2) can no longer alter the size or timing of the payment without breaching the contract. Non-discretionary bonuses are typically based on the performance of an employee or group of employees.

For example, salespeople may be promised a special bonus by their boss if they reach a certain sales goal. If they reach the goal, they become legally and contractually entitled to the bonus.

What are some things that I should know about non-discretionary bonuses?

Employees who stand to receive a non-discretionary bonus should know at least the following 5 things:

1. non-discretionary bonuses are a form of compensation that the worker can expect,
2. they alter the worker’s regular rate of pay,
3. for non-exempt workers, they can change a worker’s overtime pay,
4. it does not matter whether the employer calls it a discretionary bonus, and
5. they are often used to incentivize positive workplace conduct.

Workers with questions or concerns about these types of bonuses should seek the legal advice of an employment lawyer.

1. Can I expect a non-discretionary bonus?

The hallmark of a non-discretionary bonus is that the employee can expect to receive it.

Regulations promulgated by the U.S. Department of Labor (DOL) for the federal Fair Labor Standards Act (FLSA) define non-discretionary bonuses. They are any additional payment to an employee that does not amount to a discretionary bonus.¹ Discretionary bonuses are any payment in addition to a worker’s regular earnings

• that are not expected by the worker and
• that are at the sole discretion of the employer.²

Therefore, non-discretionary bonuses are payments that are expected and that are not at the sole discretion of the employer.

Some examples of non-discretionary bonuses include:

• promised sign-on or hiring bonuses,
• those that are the result of a collective bargaining agreement,
• announced bonuses meant to induce employees to work more steadily, rapidly, or efficiently,
• bonuses that are announced and meant to keep employees with the company, like seniority bonuses,
• attendance bonuses,
• production bonuses,
• bonuses for quality and accuracy of work, and
• payments for a set number of days without a workplace accident.³

Some bonuses are neither clearly discretionary nor non-discretionary. Referral bonuses, for example, could be either type of bonus, depending on the circumstances.

2. Can they impact my regular rate of pay?

Non-discretionary bonuses can change a worker’s regular rate of pay.

The FLSA states that a worker’s “regular rate of pay” includes all of his or her remunerations for employment, except for:

• sums paid as gifts,
• payments for periods when no work was performed because of vacation, holiday, illness, or the failure of the employer to provide it,
• reasonable payments incurred by the employee in the furtherance of the employer’s interests,
• discretionary bonus payments,
• health insurance, or other similar contributions,
• overtime hours,
• holiday pay, and
• stock options provided to the employee.⁴

Bonuses that are non-discretionary, however, are not excluded from the regular rate of pay.⁵ Because they are not excluded from the calculation of a worker’s regular hourly rate, they can alter it.

3. Does this impact my overtime pay?

Yes, non-discretionary bonuses can impact a non-exempt employee’s overtime pay.

The overtime rate calculation is based on the worker’s total hours worked, multiplied by the normal rate of pay for straight time. Because non-discretionary bonuses can alter a worker’s regular rate of pay, they can also impact the worker’s overtime rate. The amount of the bonus can lead to additional overtime pay.

Some employees are exempt from state and federal wage and hour laws. Employees who are not exempt from these laws are entitled to overtime pay if they work over a set number of hours. These are “non-exempt” employees. Under the FLSA, non-exempt employees are entitled to receive time-and-a-half pay for every hour they work beyond 40 hours in a workweek.

That time-and-a-half pay is based on the worker’s regular rate of pay. The overtime rate is one-and-one-half times the worker’s regular rate of pay for the pay period. When the regular rate of pay increases, the overtime premium increases, as well.

For example: Carolyn is a non-exempt, hourly worker who makes $20 per hour. She works 50 hours in one week. For this, she makes $1,100 – $1,000 for the 50 hours at $20 per hour, plus $100 in overtime for the extra 10 hours, for which she was paid an additional $10 per hour. The next week, she works the same amount of hours, but also earns a $100 non-discretionary bonus for being with the company for 2 years. Her regular rate of pay for this second week would be $1,100 – $20 per hour, plus the $100 bonus – over 50 hours. This means that her hourly rate is $22 per hour. She would make an additional $11 per hour in overtime pay, rather than the additional $10 per hour she made, the week before. Carolyn would make an extra $10 in overtime pay.

4. What if my employer calls it a discretionary bonus?

Whether a bonus is a discretionary or a non-discretionary one depends on the circumstances surrounding the payment, not the label the employer attaches to it.

Because non-discretionary bonuses impact an employee’s regular rate of pay and overtime calculation, employers may claim that a bonus was discretionary. This would prevent the regular rate of pay and overtime payments from going up. This would save the employer money.

The FLSA does not allow for this. Instead, the federal employment law says that the label on a particular bonus is not determinative. Employers can call the bonus whatever they want to call it. The facts specific to the bonus at issue will determine whether it is a discretionary bonus or not.⁶

5. Why do employers use non-discretionary bonuses?

Employers frequently use non-discretionary bonuses to reward high-quality work and workplace stability.

Some of the most common types of non-discretionary bonuses are

• for workers who achieve a certain level of seniority, and
• for workers who reach a specified level of production.

These bonuses are not discretionary because the employer has to announce them, first.

Production bonuses create the workers’ expectation that, if they achieve the stated goal, they will receive the bonus. The expectation induces the effort. Bonus pay for staying with the company for a set amount of time improves worker retention. Employers offer these bonuses to reduce turnover and improve workplace morale.

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Legal References:

1. 29 CFR 778.211(c).
2. 29 USC 207(e).
3. 29 CFR 778.211(c).
4. 29 USC 207(e).
5. 29 CFR 778.211(c).
6. 29 CFR 778.211(d).