On January 5, 2026, the United States Department of Labor, Wage and Hour Division (DOL) issued six new opinion letters interpreting the Fair Labor Standards Act (FLSA) and the Family Medical Leave Act (FMLA). Lerch Early employment attorneys Jim Hammerschmidt and Nicole Behrman will be covering several of these opinion letters in a weekly blog series.

Up first, the DOL opinion letter FLSA2026-2 addresses when a bonus is considered “discretionary” and can be excluded from the calculation of a nonexempt employee’s regular rate of pay. This issue is a trap for the unwary employer.

Many companies do not realize that when they pay a bonus, the amount increases the employee’s overtime rate of pay. Even worse, a failure to comply with the law in this area can result in the employer owing the employee two-to-three times the amount of the shortfall, plus attorneys’ fees.

The bottom line: Missteps can be very costly, particularly if the employer has a large number of employees participating in a bonus program that is not properly administered.

The Details of the Opinion Letter

This opinion letter concerns an employer in the waste management industry that employs drivers and classifies these drivers as nonexempt, i.e., they are entitled to minimum wage and overtime under the FLSA.

The drivers are paid an hourly rate of $12 per hour. They are also eligible to earn performance-based bonuses each pay period based on the employee’s punctuality, attendance, consistency in completing safety tasks, driving safely, proper attire, and overall performance efficiency. These bonuses are paid on an hourly basis.

The employer has detailed criteria and formulas to determine whether the employee has earned the bonus and how to calculate the hourly bonus the employee earns. The employer requested the DOL’s opinion on whether it can exclude these bonuses from the calculation of the employee’s regular rate of pay as “discretionary” bonuses.

The FLSA Requirements

Stepping back for moment, the FLSA requires employers to pay nonexempt employees minimum wage for all hours worked and overtime pay at a rate of one and one-half times the employee’s regular rate of pay for all hours worked over 40 in a workweek.

The regular rate of pay is calculated by dividing the employee’s total earnings paid for that workweek, minus any amounts that can be excluded under law, by the employee’s total hours worked in that workweek.

The FLSA allows employers to exclude “discretionary” bonuses from this calculation when:

1) The fact and amount of the bonus is determined at the sole discretion of the employee;

2) This determination must be made at or near the end of the period when the employee’s work was performed; and

3) The bonus must not be made pursuant to any prior agreement, contract, or promise that would cause the employee to expect this bonus.

When is a Bonus Discretionary?

Importantly, however, merely stating in a bonus plan or policy that the employer retains “sole discretion” whether to pay a bonus is typically not sufficient, particularly where the bonus plan contains matrices, criteria, or requirements for the employee to earn the bonus.

A bonus that is nondiscretionary is akin to the purely gratuitous end-of-the-year holiday bonus given to employees after the company sees how the year has turned out and then decides to reward its employees without any preconceived plan, policy, or amount, if any, about the bonus.

Here, the DOL confirmed that bonuses made pursuant to a predetermined plan are not discretionary.

The DOL emphasized that because the employer’s policy automatically triggered the bonus upon meeting the criteria, the employer retained no discretion regarding the fact and amount of payment. Accordingly, the DOL determined that the payments were not discretionary and must be included in the regular rate calculation to determine the employee’s overtime rate.

The opinion letter also includes an example of how to calculate the regular rate with inclusion of the bonus at issue:

James earns a base hourly rate of $12.00 per hour and works a total of 50 hours in a workweek in which, based on the predetermined incentive terms, the employer pays an additional $5.60 per hour for all hours worked as a non-discretionary bonus. His total straight-time earnings are $880.00 ((50 hours × $12.00) + (50 hours × $5.60)).

His regular rate for the workweek is therefore $17.60 ($880.00 ÷ 50 hours) and the half-time rate is $8.80 ($17.60 × 0.5). Thus, he is entitled to an additional $8.80 per hour for each overtime hour worked for a total overtime premium of $88.00 ($8.80 × 10 overtime hours), increasing his total wages to $968.00 ($880.00 (straight-time earnings for all hours worked) + $88.00 (half-time due for all hours worked over 40 per workweek)).

Next Steps for Employers

Moving forward, employers will want to review their existing bonuses for non-exempt employees and confirm whether these bonuses need to be included in the regular rate calculation.

Further, employers need a clear understanding of what workweeks may be affected by a bonus payment. For example, a nondiscretionary bonus earned and paid on a monthly basis may require the employer to recalculate the overtime rate for workweeks for which the employee has already been paid and then make up the difference.

Because payment of bonuses to nonexempt workers is a very tricky area of the law, we highly recommend that any bonus plan or policy be reviewed by an attorney and that the employer understand whether the plan may be discretionary or not, and how bonus payments affect overtime pay.

Jim Hammerschmidt’s practice includes a range of commercial, corporate, and employment counseling and litigation in Maryland and the District of Columbia. You can reach him at 301-841-0189 or at jrhammerschmidt@lerchearly.com

Nicole Behrman is an employment attorney who represents clients in a wide range of matters in Maryland and the District of Columbia. You can reach her at 301-657-0744 or at nmbehrman@lerchearly.com.