Bonuses, Commissions, and Tips Count Toward Overtime: Is Your Employer Calculating It Right?

Most workers know that eligible employees generally must receive overtime at one and one-half times their regular rate for hours worked over 40 in a workweek. What many workers do not realize is that the regular rate is not always the same as the base hourly wage.

Under the Fair Labor Standards Act (FLSA), the regular rate generally includes compensation for employment unless the law specifically excludes it. That can include nondiscretionary bonuses, commissions, shift differentials, and other forms of compensation. When an employer leaves those payments out of the overtime calculation, the employee may be underpaid.

What Is the “Regular Rate”?

The FLSA requires covered, nonexempt employees to receive overtime of at least one and one-half times the regular rate for hours worked over 40 in a workweek. 29 U.S.C. § 207.

The regular rate is generally calculated by taking the employee’s compensation for the workweek, excluding payments the FLSA specifically permits an employer to leave out, and dividing that amount by the total hours worked.

This is why an employer may not always calculate overtime simply by multiplying a base hourly wage by 1.5. If other compensation must be included, the regular rate may be higher.

Bonuses: Which Ones Count?

Bonuses are one of the most common sources of regular-rate errors. The basic question is whether the bonus is included in the regular rate or qualifies for a statutory exclusion.

Nondiscretionary Bonuses

Nondiscretionary bonuses generally must be included in the regular rate. These are bonuses employees can reasonably expect because the employer has announced them in advance, promised them, or tied them to a formula or performance requirement.

Examples can include:

• Production or productivity bonuses
• Attendance bonuses
• Safety bonuses
• Quality or performance bonuses
• Retention or longevity bonuses that do not qualify for an exclusion
• Other incentive payments based on predetermined criteria

If a bonus covers work performed in earlier weeks, the employer may need to recalculate the regular rate for those weeks and pay additional overtime. The Department of Labor specifically explains that nondiscretionary bonuses must be included in the regular-rate calculation.

What About a “Discretionary” Bonus?

Simply calling a bonus “discretionary” does not automatically make it excludable.

Under the FLSA, a bonus generally qualifies for the discretionary exclusion only when the employer retains sole discretion over both whether to pay it and the amount of the payment until at or near the end of the relevant period, and the payment is not made pursuant to a prior contract, agreement, or promise that causes employees to expect it regularly.

The determination is fact-specific. The name given to the bonus is not controlling.

Commissions and Shift Differentials

Commissions generally count toward the regular rate. This can create an important issue when commissions are paid monthly or quarterly rather than weekly.

When a commission covers multiple workweeks, the employer generally must allocate the commission to the weeks covered by the payment and recalculate the regular rate and overtime owed for those weeks. 29 C.F.R. § 778.117.

Similarly, compensation such as a shift differential may need to be included in the regular rate. The question is whether the particular payment is compensation that the FLSA requires to be included or falls within a statutory exclusion.

What Does Not Count?

The FLSA contains specific exclusions from the regular rate. They include certain:

• Gifts and payments made as gifts on special occasions
• Payments for certain periods when no work is performed, such as vacation or sick leave
• Reimbursements for qualifying business expenses
• Discretionary bonuses that satisfy the statutory requirements
• Qualifying profit-sharing, savings, and benefit-plan contributions
• Certain premium payments for work performed under specified circumstances
• Certain payments involving performers or equity compensation

These exclusions are technical and fact-dependent. A payment does not become excludable merely because an employer gives it a particular name. The Department of Labor describes the statutory list as an exhaustive list of exclusions from the regular rate.

Tips and Service Charges Are Different

Tipped employees face additional rules, and it is important to distinguish tips from mandatory service charges.

Customer Tips

Customer tips generally are not treated the same way as employer-paid wages for purposes of the regular-rate calculation. However, tipped employees are subject to separate FLSA rules governing minimum wage, tip credits, tip pools, and overtime.

When an employer takes a tip credit, overtime generally must be calculated using the full applicable minimum wage rather than simply the lower direct cash wage paid by the employer.

Mandatory Service Charges

A mandatory service charge added to a customer’s bill is different from a tip. Depending on how the charge is handled, amounts paid to employees from a service charge may constitute wages that must be included in the regular rate.

This issue can be particularly important in restaurants, hotels, banquet facilities, and other hospitality businesses.

How to Spot a Possible Error

A regular-rate problem may deserve further investigation if:

• Your overtime rate is always based on your base hourly wage even when you receive bonuses.
• You receive a production, attendance, safety, quality, or other incentive bonus but never receive an overtime adjustment.
• You receive monthly or quarterly commissions but your prior weeks are never recalculated.
• You receive a shift differential or other additional compensation that never appears to affect your overtime rate.
• Your employer distributes money from mandatory service charges but does not appear to account for those payments when calculating overtime.

None of these facts, standing alone, necessarily establishes a violation. The correct calculation depends on the type of payment, how it was earned, when it was paid, and whether a statutory exclusion applies.

What You May Be Able to Recover

If an employee prevails on an FLSA claim for unpaid overtime, potential remedies can include:

• Unpaid overtime wages caused by the incorrect regular-rate calculation.
• Liquidated damages in an amount equal to unpaid wages, subject to applicable defenses and exceptions. 29 U.S.C. § 216(b).
• Attorney’s fees and court costs when the employee prevails on a covered FLSA claim.
• Additional remedies under state law, where available.

The amount of any potential recovery depends on the employee’s pay, hours, compensation structure, dates at issue, classification, and applicable federal and state law. Past results do not guarantee a similar outcome in another case.

Time Limits Matter

Federal FLSA claims generally are subject to a two-year limitations period, extended to three years for willful violations. 29 U.S.C. § 255(a).

State wage laws may impose different deadlines and may provide additional remedies. Because limitations periods can affect how much an employee may recover, it is important to investigate a potential claim promptly.

What to Do If Your Overtime Looks Wrong

Save Your Pay Records

Keep pay stubs and records showing your hours and compensation. Pay particular attention to weeks in which you received bonuses, commissions, differentials, or other additional pay.

Identify Every Form of Compensation

Make a list of the compensation you receive beyond your base wage. The details of each payment may affect the regular-rate calculation.

Look for Missing Adjustments

If you receive a bonus or commission after the workweek in which it was earned, check whether the employer made any corresponding overtime adjustment. A missing adjustment may be a warning sign.

Consider a Legal Evaluation

Regular-rate claims can involve detailed payroll calculations. An experienced wage-and-hour attorney can review your pay records and determine whether federal or state law may provide a claim.

Your Overtime Rate May Be Higher Than Your Base Wage

The FLSA generally requires overtime to be calculated using the employee’s regular rate, which can include more than the base hourly wage. Bonuses, commissions, differentials, and other compensation may increase that rate unless the payment falls within a statutory exclusion.

If your employer consistently calculates overtime using only your base wage despite paying you additional compensation, you may want to have your pay records reviewed. Depending on the facts, you may be entitled to unpaid overtime and other remedies under federal or state law.

Josephson Dunlap, Lawyers for the Workers®, represents employees nationwide in wage and hour matters. We offer confidential case evaluations at no cost.