How Bonuses Increase Overtime Pay

Financial bonuses can be a source of motivation, benefiting both employee and employer, but what many don’t know is that for hourly workers in California, bonuses can actually make overtime pay higher.

California labor laws make it so that an employee’s overtime is calculated based on the “regular rate” of pay for the employee. The regular rate includes not just hourly wages, but additionally, any nondiscretionary bonuses.

According to the California Labor Commissioner’s Office, nondiscretionary bonuses are included in determining an employee’s regular rate of pay. Nondiscretionary means that it is compensation for hours worked, for production or proficiency, or as an incentive to stay with that employer. These include flat sum bonuses. These bonuses must then be used as part of the regular rate of pay, meaning that they may make an employee’s overall overtime pay higher. Nondiscretionary bonuses are sometimes called “earned” bonuses, because they are based on some measurable factor like hours worked, new business, or profit.

By contrast, discretionary bonuses are not factored into making overtime pay higher. Discretionary bonuses, sometimes referred to as “unearned” bonuses, aren’t really unearned—they’re simply not obligatory, and not based on measurable data like hours or profit. Instead, discretionary bonuses are paid as gifts at a holiday, work anniversary, or other special occasion, and are not dependent on hours worked, production or efficiency.

Understanding the effect of bonuses and incentives is especially important in the midst of the ongoing coronavirus pandemic, as many companies have been offering bonuses and incentives that may not have done so under normal circumstances. It is important that employees understand how these bonuses may make their overtime pay higher so they can demand their proper compensation, especially in a year as financially challenging as this one. It should be noted that many of the pandemic-related bonuses may be discretionary gifts, and thus not considered part of the regular rate of pay.

Regardless of whether a bonus is discretionary or nondiscretionary, both types of bonuses are considered “wages” under California Labor Code, and thus must be paid in a timely manner. But only nondiscretionary bonuses may make overtime pay higher.

Calculating overtime pay based on the regular rate (including nondiscretionary bonuses) can be explained in three steps, as laid out by a helpful California Department of Labor fact sheet.

Step 1: Total compensation for the week (except the statutory exclusions) ÷ Total hours worked in the week = Regular Rate per hour for the week (must be at least the federal minimum wage)

Step 2: Regular Rate x (.5) = Half-time premium for each overtime hour (note the straight time for the overtime hours is included in Step 1)

Step 3: Half-time premium pay rate x Overtime hours = Overtime compensation due

Including nondiscretionary bonuses in an employee’s regular rate of pay when determining their overtime rate may create payroll problems, but companies that ignore these regulations can find themselves facing down the California Department of Labor, which has been cracking down on this issue.

If an employer faces an audit or an employee files a claim, the DOL could require the company to pay all employees their unpaid overtime wages over the previous two to three years, depending on whether or not the violation was wilful, plus interest and even potential penalties.

If you are a current or former hourly employee in California and have received a financial incentive or bonus from your employer, you may be able to participate in this overtime wage and hour lawsuit investigation. You may be eligible for legal help, back-pay, and more.

Some companies may be underpaying overtime wages to certain hourly workers in California. A number of businesses are currently being investigated by a team of attorneys for potential underpayment practices.