DOL Opinion Letter Clarifies That Incentive Bonuses — Not Discretionary Bonuses —Must Be Included in the Regular Rate of Pay, Which Is Consistent With Colorado Law
Bayan Biazar, Associate
Earlier this month, the U.S. Department of Labor’s Wage and Hour Division (“DOL”) issued Opinion Letter FLSA2026-2 (“Opinion Letter”), providing additional guidance on when bonus payments must be included in an employee’s “regular rate of pay” for purposes of calculating overtime under the Fair Labor Standards Act (“FLSA”).[1]
Background and Determination
Under the FLSA, employers must pay non-exempt employees at least the federal minimum wage for all hours worked and overtime at one-and-a-half times the regular rate of pay for hours worked over 40 in a workweek.[2] The definition of the “regular rate” includes nearly all remuneration paid to an employee, with limited exceptions.[3]
In the Opinion Letter, the DOL considered an employer’s practice of paying non-exempt waste-management drivers a base hourly wage plus additional compensation under a performance bonus plan. The employer excluded these bonus amounts from the regular rate when computing overtime pay. The DOL rejected that exclusion, concluding that the bonuses at issue do not qualify as discretionary and therefore must be included in the regular rate of pay for overtime purposes. In reaching this conclusion, the Opinion Letter emphasized that, since the bonus plan’s terms were predetermined, communicated to the employees before the work was performed, and tied to certain objective criteria, these bonuses were non-discretionary incentive bonuses that had to be part of the employees’ regular rate of pay and said employees were subject to an overtime shortfall of $4.75 per hour.
Discretionary and Incentive Bonuses Under the FLSA
The distinction between discretionary bonuses and incentive bonuses determines whether a bonus may be excluded from an employee’s regular rate of pay. For a bonus to be discretionary and excludable, it must satisfy the following three criteria: (1) the fact and amount of the payment must be determined at the sole discretion of the employer; (2) the employer’s determination must occur at or near the end of the period when the employee’s work was performed; and (3) the payment must not be made pursuant to any prior contract, agreement, or promise causing the employee to expect such payments regularly.[4] Incentive bonuses, in contrast, are tied to things like employee performance, safety, productivity, or similar criteria and are considered non-discretionary when eligibility and payment terms are established in advance. Because incentive bonuses are earned based on predefined conditions and are reasonably expected by employees who meet those conditions, they must be included in the regular rate of pay when calculating overtime under the FLSA.
The DOL’s Example
To show the effect of including incentive bonuses in an employee’s regular rate, the Opinion Letter provided an example showing how overtime calculations change and should be properly accounted for under an incentive-based bonus plan. Under these plans, overtime rates increase resulting in higher overtime premiums than would apply if the bonus plan was discretionary. The example shows how excluding incentive-based bonuses can result in an underpayment of overtime to employees and create potential pay-related issues under the FLSA.
Impact on Colorado Employers
For Colorado employers, the Opinion Letter is unlikely to have a significant practical impact because Colorado law already draws a similar distinction between discretionary and non-discretionary bonuses. Under guidance issued by the Colorado Department of Labor and Employment, non-discretionary bonuses, like those tied to performance, productivity, or other objective criteria, must be treated as wages and included when calculating overtime, while truly discretionary bonuses may be excluded.[5] As a result, the DOL’s reaffirmation that incentive bonuses must be included in the regular rate largely mirrors existing Colorado requirements.
Employer Considerations
The Opinion Letter serves as a reminder that incentive-based compensation tied to productivity, performance, safety, or similar criteria will generally need to be included in the regular rate of pay when calculating overtime. Employers should review their bonus plans to determine whether the plans create an incentive bonus or a discretionary bonus and if the plan creates an incentive bonus, employers should evaluate their payroll practices to ensure overtime is being calculated using the correct regular rate, particularly where bonus eligibility or amounts are communicated to employees in advance.
[1] See https://www.dol.gov/sites/dolgov/files/WHD/opinion-letters/FLSA/FLSA2026-2.pdf for the full Opinion Letter.
[2] See 29 U.S.C. §§ 206, 207(a)(1).
[3] See id. at § 207(e).
[4] See id. at § (3); see also 29 C.F.R. § 778.211.
[5] See Colo. Dep’t of Lab. & Emp., INFO #3D.