How Bonuses and Commissions Affect Overtime Pay
Overtime is based on the regular rate, not always the base rate
For covered, nonexempt employees, the Fair Labor Standards Act generally requires overtime pay for hours worked over 40 in a workweek at not less than one and one-half times the employee’s regular rate. The regular rate is an hourly rate derived from the compensation that must legally be included for that workweek.
The regular rate may include:
- Hourly wages
- Salary allocated to the workweek
- Piece-rate earnings
- Commissions
- Shift differentials
- Production incentives
- Attendance or safety bonuses that are promised in advance
- Other nondiscretionary compensation tied to work, performance, or continued service
Discretionary vs. nondiscretionary bonuses
Nondiscretionary bonuses
A bonus is generally nondiscretionary when the employer promises it in advance or employees expect to receive it after meeting stated criteria. These payments usually must be included in the regular rate unless a specific statutory exclusion applies.
Common examples include:
- A production bonus for reaching a target
- An attendance bonus for having no unexcused absences
- A retention bonus promised for staying through a specified date
- A quality or efficiency incentive
- A commission based on sales
- A bonus announced to encourage employees to work faster or take extra shifts
Discretionary bonuses
A discretionary bonus may be excluded when both the fact of payment and the amount are determined at the employer’s sole discretion at or near the end of the period, and the payment was not promised or expected under a prior agreement. Calling a payment a “discretionary bonus” on the pay stub is not enough. The actual facts and communications matter.
For example, an unexpected year-end gift that is not tied to hours, production, efficiency, or a prior promise may qualify for exclusion. By contrast, a “discretionary” quarterly bonus based on a published performance formula is likely nondiscretionary.
Step-by-step bonus overtime example
Assume an employee:
- Earns $20 per hour
- Works 45 hours in one workweek
- Earns a $200 production bonus for that same week
Step 1: Calculate straight-time earnings
45 hours × $20 = $900
Step 2: Add the nondiscretionary bonus
$900 + $200 = $1,100 compensation included in the regular rate
Step 3: Determine the regular rate
$1,100 ÷ 45 hours = $24.4444 regular rate
Step 4: Calculate the additional overtime premium
Because the $1,100 already includes straight-time compensation for all 45 hours, the additional overtime premium is one-half of the regular rate for the five overtime hours:
$24.4444 × 0.5 × 5 = $61.11
Step 5: Calculate total gross compensation
$1,100 + $61.11 = $1,161.11
If payroll calculated overtime only as five hours at $30 and then added the bonus without making the proper regular-rate adjustment, the result could be too low.
What happens when a bonus covers several weeks?
A monthly, quarterly, or annual nondiscretionary bonus may need to be allocated back across the workweeks in which it was earned. The employer then recalculates the regular rate for each affected overtime workweek and pays any additional overtime due.
The exact allocation method depends on what the bonus rewards. A bonus based on hours worked may be allocated according to hours. A bonus that applies equally to each week may be divided across those weeks. Payroll should not simply place the entire bonus into the week in which it was paid when the payment was actually earned over a longer period.
How commissions affect overtime
Commissions are generally included in the regular rate for nonexempt employees unless a specific exemption applies. The commission must be allocated to the workweeks in which it was earned, as accurately as possible, and overtime may need to be adjusted after the commission amount becomes known.
Some retail or service employees may qualify for the FLSA Section 7(i) commissioned-employee exemption, but the exemption has multiple requirements. Receiving a commission does not automatically eliminate overtime rights.
Other payments that may affect the regular rate
- Shift differentials: Extra hourly amounts for nights, weekends, or difficult shifts usually increase the regular rate.
- Hazard pay: Often included when paid as compensation for work performed.
- On-call premiums: Treatment depends on the payment structure and applicable exclusions.
- Gifts: Certain genuine gifts for special occasions may be excluded if they are not tied to hours, production, or efficiency.
- Expense reimbursements: Reasonable reimbursements for business expenses may be excluded, while excessive payments may require additional analysis.
Payroll warning signs
- Every employee’s overtime rate is exactly 1.5 times the base hourly wage despite bonuses or differentials.
- A promised bonus is labeled “discretionary” without examining how it was earned.
- Monthly commissions are paid without any retroactive overtime adjustment.
- Production bonuses are added after overtime is calculated and never included in the regular rate.
- The employer divides weekly salary by 40 even when another lawful regular-rate method is required.
How employees can check their pay
- Collect the pay stub, timecard, compensation plan, and bonus announcement.
- Identify which payments were tied to work, performance, attendance, sales, or continued employment.
- Determine the workweek or workweeks in which the payment was earned.
- Add includable compensation and divide by total hours worked.
- Compare the resulting overtime premium with the amount actually paid.
Start with the Overtime Pay USA calculator for a basic estimate, then adjust the regular rate when bonus or commission compensation must be included.
Bottom line
The overtime rate is not always simply 1.5 times the stated hourly wage. Bonuses, commissions, incentives, and shift premiums can raise the regular rate. The correct calculation requires identifying all includable compensation, allocating it to the proper workweek, and paying the additional overtime premium.
This article is for educational purposes only and is not legal, tax, payroll, or financial advice. Rules may vary by state, industry, compensation plan, and employee classification.
Official sources
- U.S. Department of Labor — Fact Sheet #56A: Regular Rate of Pay
- U.S. Department of Labor — Fact Sheet #56C: Bonuses
- U.S. Department of Labor — Fact Sheet #20: Commissioned Retail Employees
Frequently Asked Questions
Do bonuses increase overtime pay?
Many promised or formula-based bonuses do because they are usually included in the employee’s regular rate. Truly discretionary bonuses may qualify for exclusion.
What is a nondiscretionary bonus?
It is generally a bonus promised in advance or earned by meeting stated criteria such as production, attendance, quality, sales, or retention goals.
Can an employer call a bonus discretionary to exclude it?
The label alone does not control. The actual arrangement, employee expectations, written criteria, and timing of the employer’s decision determine whether the bonus is discretionary.
Do commissions count when calculating overtime?
Commissions generally must be included in the regular rate for nonexempt employees unless a specific exemption or exclusion applies.
How is overtime corrected when a bonus is paid later?
The bonus is generally allocated to the workweeks in which it was earned. Payroll then recalculates the regular rate for affected overtime weeks and pays any additional premium due.