Bonus Pay and Overtime in California: Are You Owed Money?

For many employees, an incentive bonus can add a significant amount to their overall salary. But, did you know that your bonus pay can also increase your overtime pay?

Employees may work very hard to receive financial incentives. Unfortunately, some employers may purposely fail to calculate bonuses into overtime pay — or they may calculate it incorrectly, resulting in underpayment of the overtime to which you are rightfully entitled.

Employers who do not include non-discretionary bonus pay when calculating overtime pay for non-exempt employees in California may be violating state labor laws, as well as the federal Fair Labor Standards Act (FLSA). Also, you may be owed money.

What is Bonus Pay?

A bonus can come in many different forms. However, there are two main categories of bonuses in California — discretionary and non-discretionary bonus pay. Discretionary bonuses usually come in the form of a gift from an employer, such as a year-end bonus. These types of bonuses are not guaranteed and an employer can choose whether or not to provide them.

Non-discretionary bonus pay — sometimes called incentive pay — is pay an employee is entitled to receive as part of their work obligations or performance. This type of bonus may be part of an employee’s contract and associated with reaching productivity or sales goals. According to the California Department of Industrial Relations, incentive bonuses also include flat sum bonus earnings.

California Labor Law treats both discretionary and non-discretionary bonuses as wages. However, according to California law and the FLSA, only non-discretionary bonus pay is counted toward overtime since it is earned, unlike discretionary bonuses.

How Does It Work?

Bonus pay is meant to be an addition to your regular salary. Generally, companies have their own set of specific criteria or benchmarks that you must meet in order to receive an incentive bonus.

Since bonuses are considered wages in California, they must be paid timely — and simultaneous with any other wages you earned during the pay period. Bonuses are also taxed, like your regular wages. Similarly, if you leave your job or are terminated, you’re entitled to any non-discretionary or incentive pay that you earned.

How Bonus Pay Increases Overtime Pay

In California, overtime pay is calculated based on an employee’s regular pay rate — not only does the pay rate include the base salary, but it also factors in non-discretionary bonuses. Effectively, this means that your overtime pay can be increased since a bonus makes your regular pay rate higher.

Under California labor law, non-exempt workers are entitled to receive overtime for every hour worked after eight hours in a workday and each hour worked beyond 40 hours in a week.

Specifically, California calculates the rate of overtime attributable to the bonus pay by dividing the bonus amount by how many regular hours were worked — this will result in the pay rate on the flat sum bonus earnings. Overtime on this amount must be paid at either 1.5 times or double the regular calculated rate for each overtime hour worked during the period in which the bonus was earned.

However, overtime on bonuses that are an incentive for increased production for every hour worked are computed differently. It is calculated by dividing the bonus by the total number of hours worked during the period in which the bonus was earned — this produces the regular pay rate on the bonus. Overtime is paid at .5 times or one times what the regular rate is for each overtime hour worked during the period.

Regardless of the type of bonus, it must be paid promptly on either a weekly or daily basis in the pay period following that in which the bonus was earned.