Are Bonuses and Incentive Pay Required To Be Included in Overtime?
Many employees understand that overtime is supposed to be paid at one-and-one-half times their regular rate of pay for hours worked over 40 in a workweek.
But many workers do not realize that the “regular rate” may include more than just their base hourly rate.
In some situations, bonuses, commissions, incentive pay, shift premiums, and other forms of compensation must be included when calculating overtime. If those payments are left out, the employee’s overtime rate may be too low.
What Is the Regular Rate of Pay?
The regular rate of pay is the rate used to calculate overtime.
For hourly employees, it may seem like the regular rate is simply the employee’s hourly wage. But under federal wage law, the regular rate can include other compensation paid to the employee.
For example, if an employee earns:
hourly wages,
production bonuses,
attendance bonuses,
shift premiums, or
other incentive payments,
those payments may need to be factored into the overtime rate.
Why This Matters
When extra compensation is excluded from the overtime calculation, employees may receive overtime pay that is lower than what the law requires.
For example, assume an employee earns:
$20 per hour,
works more than 40 hours in a week, and
also earns a performance bonus that week.
If that bonus must be included in the regular rate, the employee’s true overtime rate may be higher than overtime calculated using only the $20 hourly rate.
That difference may seem small on a single paycheck, but it can become significant when the same pay practice continues over months or years.
Common Types of Pay That May Affect Overtime
Depending on the circumstances, overtime calculations may need to include:
nondiscretionary bonuses,
attendance bonuses,
production bonuses,
performance bonuses,
commissions,
piece-rate earnings,
shift differentials,
incentive pay, and
certain premium payments.
The key issue is often whether the payment is connected to the employee’s work, productivity, hours, attendance, or performance.
Discretionary vs. Nondiscretionary Bonuses
One important distinction is whether a bonus is truly discretionary.
A nondiscretionary bonus is generally a bonus that employees expect to receive if they meet certain conditions. Examples may include bonuses based on:
attendance,
productivity,
sales,
quality metrics,
meeting performance goals, or
working certain shifts.
These bonuses often must be included in the regular rate when calculating overtime.
A discretionary bonus is different. A bonus may be discretionary when the employer decides, in its sole discretion, whether to pay it and how much to pay, without promising it in advance.
Labels are not always controlling. Calling something “discretionary” does not automatically make it discretionary if employees are promised the payment for meeting specific criteria.
Shift Differentials and Premium Pay
Some workers receive additional pay for working certain shifts, weekends, nights, holidays, or harder-to-staff roles.
Depending on how the payment is structured, shift differentials and similar premiums may need to be included in the regular rate.
This issue is common in workplaces that operate around the clock, including healthcare, manufacturing, warehouses, logistics, security, and customer service.
How Workers May Notice the Problem
Overtime calculation errors are often harder to detect than unpaid hours.
A worker may be receiving overtime pay, but at the wrong rate.
Potential warning signs include:
overtime always calculated using only the base hourly rate,
bonuses paid separately but not reflected in overtime,
commissions not included in overtime calculations,
incentive pay excluded from the overtime rate,
different types of extra pay treated inconsistently, or
paystubs showing overtime at a rate that seems too low.
These issues can be difficult to spot because the paycheck may look mostly correct at first glance.
Small Errors Can Add Up Over Time
Regular rate errors often involve relatively small amounts per overtime hour. But when employees regularly work overtime, those underpayments can become meaningful.
For example, if an employee receives bonuses every month but the employer never includes those bonuses in the overtime calculation, the employee may be underpaid every time they work overtime during the relevant pay periods.
If the same method is used across a department or workforce, the issue may affect many employees in the same way.
Discuss Your Situation
Overtime pay is not always calculated correctly. If you received bonuses, commissions, shift differentials, incentive pay, or other extra compensation while working more than 40 hours in a week, your overtime rate may have been too low.
If you believe your overtime was miscalculated, you may request a confidential review of your situation.
