Non-Discretionary Bonuses in California – 5 things you need to know

In California, a bonus is considered to be non-discretionary (and must be paid) if the employer

1. has already promised it and
2. can no longer alter the size or timing of the payment without breaching the agreement.

Non-discretionary bonuses are typically based on performance by 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 do, they become legally and contractually entitled to the bonus.

Employees in California who stand to receive a non-discretionary bonus should know at least the following five 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. Also listen to our informative podcast:

1. Can I expect a non-discretionary bonus?

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

California law’s definition of non-discretionary bonuses mirrors the federal law definition under the Fair Labor Standards Act (FLSA): Non-discretionary bonuses are any additional payment to an employee that does not amount to a discretionary bonus.¹ In contrast, 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?

Yes. In California, non-discretionary bonuses are part of a worker’s wages (in most cases). Consequently, non-discretionary bonuses are part of the worker’s regular rate of pay.

California law states that a worker’s “regular rate of pay” includes all of their 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

Non-discretionary bonuses, however, are not excluded from the regular rate of pay. They can alter it because they are not excluded from calculating a worker’s regular hourly rate.

As with regular wages, non-discretionary bonuses must be paid on the regular payday for the period the employee earned them. The employer may owe the worker penalties if the bonus is not paid on the regular payday.

Employers must provide employees with itemized wage statements that show the amount of non-discretionary bonuses separately from regular wages. The statement should also include the period for which the bonus was earned.

Finally, when an employee separates from employment, whether voluntarily or involuntarily, they are entitled to receive any unpaid non-discretionary bonuses that were earned but not yet paid.⁵

3. Does this impact my overtime pay?

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

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 bonus amount can lead to additional overtime pay.

Some employees are exempt from California 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 California law, 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?

In California, whether a bonus is discretionary or non-discretionary 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, saving the employer money.

The FLSA and California law do not allow for this. Instead, the 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 in California 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.

Additional Resources

If you are a victim of wage theft in California, consider filing a wage claim with the California Labor Commissioner by following these five steps explained in detail on their website:

1. File your wage claim: This can be done online, and you usually have three years from the missed payment to file a claim.
2. Gather required documentation: This may include past pay stubs, your employment contract, and anything in writing or recorded that indicates your employer owes you money.
3. Attend your settlement conference: Most wage claims are resolved at this conference, which is mediated by a deputy labor commissioner.
4. Attend your wage claim hearing: If your case does not settle, you are entitled to a hearing, which is like a mini-trial. You can bring witnesses to testify on your behalf.
5. Appeal the decision: If you are dissatisfied with the hearing officer’s decision, you may appeal to your local superior court.

You are advised to consult with a labor law attorney as soon as possible to make sure you are not missing a filing deadline and to represent you at the settlement conference, hearing, and/or appeal.

Legal References:

1. 29 CFR 778.211(c). See also Ferra v. Lowes Hollywood Hotel, LLC (2021) 11 Cal. 5th 858. California Labor Code 204(b).
2. 29 USC 207(e).
3. 29 CFR 778.211(c).
4. 29 USC 207(e).
5. California Labor Code 226. California Labor Code 201. 29 CFR 778.211(c).
6. 29 CFR 778.211(d).