On May 28, 2026, the United States Department of Labor (DOL) Wage and Hour Division (WHD) issued an opinion letter addressing whether an employer’s quarterly bonus plan is compliant with the Fair Labor Standards Act (FLSA)’s overtime compensation requirement for non-exempt employees.
Below, KingSpry’s Employment Law Chair, Avery E. Smith, Esq., reviews the WHD’s recent guidance and explains what it means for covered employers’ incentive compensation programs.
The Employment Scenario
The employer pays a quarterly bonus to a group of employees, some of whom are entitled to overtime compensation under the FLSA. At the end of each quarter, the employer determines which employees are eligible for a bonus and the available bonus pool based on sales revenue.
To determine each employee’s share of the bonus pool, the employer calculates each employee’s total gross compensation (regular time plus overtime) as a percentage of the total gross compensation paid to all eligible employees during the quarter. For example, if the bonus pool is $100,000 and an employee’s percentage of the total gross compensation paid to all eligible employees is 5%, then the employee would receive a $5,000 bonus.
The key question is whether this bonus structure is a “percentage of total earnings” bonus under the FLSA. If yes, that means the bonus provides simultaneous payment of any required overtime pay due on the bonus in accordance with the FLSA’s overtime requirements.
Relevant Law
The FLSA requires covered employers to pay employees at least $7.25 an hour and overtime at a rate of at least one and one-half (1½) times their regular rate of pay. An employee’s regular rate is their total straight-time earnings for the week divided by the total hours worked. Overtime premiums are calculated by dividing the employee’s regular rate in half and multiplying it by the hours worked over forty (40).
Generally, non-discretionary bonuses must be included in the employee’s regular rate for purposes of calculating their overtime premium. Accordingly, calculating overtime premiums can become complicated when bonus amounts are not determined until well after the period in which the bonus is earned. In those cases, the employer initially disregards the bonus amount when computing the regular rate and overtime premium. Once the precise amount of the bonus is determined, the employer must recompute the employee’s regular rate and overtime premium, and those amounts must be allocated back to the employee (less what was already paid).
The WHD clarified that recomputing an employee’s regular rate and additional overtime pay is unnecessary for a “percentage of total earnings” bonus, like the one in question, because that type of bonus provides for “the simultaneous payment of overtime compensation due on the bonus.” In other words, no additional overtime is due, because overtime is already factored into the bonus calculation. This simplifies compliance with the FLSA, because payroll specialists need not make retroactive calculations.
Application
The WHD concluded that the employer’s quarterly bonus structure satisfies the requirements of a percentage of total earnings bonus under the FLSA, even if the bonus plan does not describe it as such. Employers and payroll specialists should take note of this, as it highlights that determining the type of bonus plan offered to employees is a fact-specific inquiry—labels and conclusions are not determinative.
Key Takeaways for Employers
The WHD’s opinion letter is fact-specific and, therefore, does not guarantee the same outcome for other employer bonus plans. Even so, WHD’s guidance highlights relevant FLSA provisions and how those provisions will likely be applied under similar circumstances. Employers using incentive compensation are encouraged to review their bonus plans to ensure compliance with the FLSA.
