Department of Labor Clarifies Inclusion of Bonus Payments in Regular Rate of Pay (February 2026 TogetHR Times)
On January 5, 2026, the U.S. Department of Labor’s Wage and Hour Division (WHD) issued Opinion Letter FLSA2026-2, providing authoritative guidance on the treatment of bonus payments under predetermined plans for purposes of calculating the employees’ regular rate of pay under the Fair Labor Standards Act (FLSA). The letter confirms the incentive-based bonuses tied to defined performance criteria generally must be included in employees’ regular rate when computing overtime, unless they meet the stringent criteria of a discretionary bonus.
Legal Framework
Under the FLSA, non-exempt employees must receive at least one and one-half times their regular rate of pay for all hours worked over 40 in a workweek. The regular rate is broadly defined to include all remuneration for employment with limited statutory exceptions. Section 7(e) of the FLSA codifies this requirement and enumerates certain types of payments that may be excluded from the regular rate. Bonuses that do not qualify for an exclusion must be included in the regular rate calculation. Regulations implementing Section 7(e) (29 C.F.R. § 778.208) clarify that bonuses must be included in determining the regular rate unless they fall within one of the specific statutory exclusions.
The central question is whether a bonus is discretionary or nondiscretionary. Discretionary bonuses are excludable from the regular rate only if all of the following conditions are met:
Both the fact of payment and the amount are determined solely at the employer’s discretion.
The determination occurs at or near the end of the period for which the bonus is paid.
The bonus is not made pursuant to any prior contract, agreement, or promise causing the employee to expect such payments regularly.
According to 29 C.F.R. § 778.211, if an employer announces or otherwise commits to a bonus in advance, it has effectively abandoned discretion with regard to either the fact or amount of payment, and the bonus is therefore nondiscretionary for regular-rate purposes. Examples of nondiscretionary bonuses include those based on predetermined formulas for attendance, productivity, safety, or accuracy. Employees cannot be made aware of the criteria, nor can they reasonably expect to earn the bonus upon meeting certain criteria.
Key Findings
The January 5 opinion letter involved a waste-management company’s pay plan under which drivers received:
A base hourly wage; plus
Incentive bonuses tied to safety, job performance, and completion of duties, calculated using a predetermined formula.
In analyzing these facts, the WHD concluded that these bonuses did not qualify as discretionary because:
The bonus eligibility and amounts were determined based on defined criteria known to employees before the work was performed.
The employer effectively abandoned discretion by promising a bonus based on meeting those criteria.
The bonus amounts were quantifiable under the plan once established.
As a result, the opinion letter states that such bonus payments must be included in the regular rate of pay for any workweek in which they are earned.
Including nondiscretionary bonuses in the regular rate affects the overtime premium. When a bonus is included in the regular rate, the additional compensation due for overtime work but be recalculated by adding the bonus to the employee’s other earnings for the workweek and dividing by the total hours worked. Failing to include nondiscretionary bonus amounts can result in underpayment of overtime premiums and potential liability for back wages and liquidated damages.
Next Steps
Organizations should take a few practical steps to ensure compliance. First things first, review and audit all bonus structures to identify any nondiscretionary payments. Payroll systems must be configured to include earnings in regular-rate computations, so contact your HRIS or payroll provider to confirm the correct earnings are included in yours. Inform your HR, payroll and supervising employees about the update and regulatory distinction. Lastly, review any employment or employee materials to eliminate language that may inadvertently create an expectation of bonus payment(s).
For further reference and discussion, the DOL has Fact Sheets that can be incredibly helpful, and when in doubt, consult with your employment law counsel or reach out to us!
References
Fair Labor Standards Act of 1938, 29 U.S.C. § 207(e) (definition of “regular rate”).
29 C.F.R. § 778.208 – Inclusion of bonuses in the regular rate of pay.
29 C.F.R. § 778.209 – Method of inclusion of bonus payments in the regular rate.
29 C.F.R. § 778.211 – Discretionary bonuses.
U.S. Department of Labor, Wage and Hour Division. Opinion Letter FLSA2026-2 (Jan. 5, 2026), addressing the inclusion of bonus payments under predetermined incentive plans in the regular rate of pay.
U.S. Department of Labor, Wage and Hour Division. Fact Sheet #56C: Bonuses and the Regular Rate of Pay under the Fair Labor Standards Act (FLSA).
Littler Mendelson P.C. DOL Opinion Letter Confirms Bonuses Under Predetermined Pay Plans Must Be Included in Regular Rate of Pay (Jan. 2026).
Lexology. U.S. Department of Labor Issues New FLSA Opinion Letters on Overtime and Bonus Calculations (Jan. 2026)
By Alison T. Bruns
