In its recently published Opinion Letter FLSA2026-6, the U.S. Department of Labor (DOL) endorsed an employer’s quarterly bonus program as a “percentage of total earnings” bonus that properly provided for the simultaneous payment of any overtime compensation due on the bonus.
Under the Fair Labor Standards Act (FLSA), employers must pay employees 1.5 times the employee’s regular rate of pay for all hours worked beyond 40 straight-time hours in a workweek. The regular rate of pay includes all remuneration paid to an employee, with limited exceptions, including nondiscretionary bonuses, which means the regular rate may be higher than an employee’s hourly rate of pay.
Generally, when an employer pays a nondiscretionary bonus, such as a quarterly bonus, the amount is often calculated well after the pay periods in which they are earned. In that case, after calculating the bonus, the employer must go back and recalculate the regular rate of pay for the bonus period and pay any additional overtime owed due to the bonus.
There is an exception, however, for “percentage of total earnings” bonuses, which factor in both straight time and overtime pay. Federal regulations state that, assuming total earnings are the sum of an employee’s total straight time and overtime earnings, a percentage of total earnings bonus is a bonus payment that provides for “the simultaneous payment of overtime compensation due on the bonus” (29 C.F.R. sec. 778.210). With this type of bonus, the overtime due on the bonus is already being paid as part of the bonus itself, and the employer doesn’t have to recalculate the regular rate of pay for the bonus period.
Under the circumstances described in the letter, the employer paid a quarterly bonus to eligible employees based on sales revenue. Specifically, at the end of each quarter, the employer determines the exact number of eligible employees and the available bonus pool based on sales revenue. Then, it generates a gross earnings report that covers both straight time and overtime pay for the quarter before setting each employee’s bonus share by calculating the percentage that the employee’s total compensation (straight time plus overtime) represents of the total gross compensation paid to all eligible employees.
For example, if the available bonus pool is $100,000 and the employee’s total gross compensation amounted to five percent of the total gross compensation paid to all eligible employees that quarter, then the employee would receive a $5,000 bonus — five percent of the $100,000 bonus pool. The employer didn’t add any extra overtime since the calculation already included straight time and overtime pay.
In their opinion letter, the DOL concluded that the employer’s quarterly bonus program includes overtime compensation, satisfying the FLSA’s overtime pay requirements. As such, the employer isn’t required to recalculate the regular rate of pay for the quarter or pay any additional overtime compensation.
Though the DOL’s opinion is specific to the FLSA, it is relevant to California employers because California law largely follows federal law regarding the regular rate of pay and a 2023 California Court of Appeals ruled that employers can calculate non-discretionary percentage bonuses using the FLSA method described in the DOL’s letter (29 C.F.R. sec. 778.210) rather than the method described in the Division of Labor Standards Enforcement Manual. Keep in mind, however, that the DOL’s opinion is not binding on courts, which are free to come to a different conclusion.
Nondiscretionary bonuses and their impact on the regular rate of pay can be complicated. Employers should consult with legal counsel to ensure they are calculating the regular rate correctly and paying all required overtime.
James W. Ward, J.D., Employment Law Subject Matter Expert/Legal Writer and Editor, CalChamber
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