DOL Opinion Letter Reinforces Inclusion Of Non-Discretionary Bonuses In Overtime Calculations: What It Means For OBBBA Overtime Reporting

The U.S. Department of Labor (DOL) issued a new Opinion Letter on January 5, 2026, concluding that all non‑discretionary bonuses must be included in an employee's regular rate of pay and, as a result, in the calculation of FLSA overtime premiums. The Opinion Letter leaves employers with little room to classify bonuses as discretionary. This has immediate implications for employers that issue bonuses and are preparing to comply with the One Big Beautiful Bill Act (OBBBA) overtime tax deduction and related reporting obligations.

Non-Discretionary vs. Discretionary Bonuses

The DOL's determination is rooted in the FLSA's "discretionary bonus" exclusion. Under Section 7(e)(3) of FLSA, a bonus does not qualify for the exclusion when the amount is determined by a pre‑announced plan tied to performance metrics—rather than the employer's sole discretion.

In the Opinion Letter, DOL explained that bonus plans using pre-set criteria or formulas — such as punctuality, attendance, safety tasks, driving safety, performance efficiency — to determine whether and in what amount a bonus is earned are "non-discretionary" under the FLSA. As a result, those bonuses must be included in an employee's regular rate of pay.

The DOL further clarified that once an employee meets the employer's stated criteria, the bonus is earned and quantifiable, meaning the employer has effectively relinquished discretion as to both the fact and amount of payment. Under the Opinion Letter, only truly discretionary bonuses — typically, those determined solely at the employer's discretion, awarded at or near the end of the measurement period, and never prospectively promised— may be excluded from the regular rate calculation under FLSA § 7(e)(3). This interpretation narrows the types of bonuses employers may deem discretionary and exclude from an employee's regular rate of pay.

Sample Overtime Calculation

The below hypothetical was included in the Opinion Letter and illustrates how non-discretionary bonuses must be incorporated into the regular rate for overtime purposes.

Hypothetical: An employee works 50 hours in a workweek at $12.00/hour and earns an additional $9.50/hour in bonuses for all 50 hours based on satisfying pre-established safety, job performance and completion of duties criteria. The DOL calculated the employee's regular rate of pay at $21.50/hour ($12.00 + $9.50). The applicable FLSA overtime rate is therefore $32.25 (1.5 × $21.50), and the employer must also ensure the employee receives the additional "half‑time" premium ($32.25-$21.50 = $10.75 for each overtime hour worked¹.

Per the DOL, when employers promise bonuses or establish qualifying conditions in advance, those bonus amounts— if earned—must be included in the regular rate for purposes of calculating overtime. Excluding non‑discretionary bonuses creates a risk of underpaying overtime in violation of the FLSA.

Impact of DOL Opinion on OBBBA Overtime Reporting

As discussed in a prior blog post, the OBBBA allows employees to exclude from federal income tax the FLSA‑required "half‑time" portion of overtime pay—up to $12,500 in "Qualified Overtime Pay" for 2025 (or $25,000 for joint filers). This income tax deduction creates a strong incentive for employees to scrutinize how their regular rate of pay is calculated,

If an employer miscalculates the regular rate, the resulting calculation of Qualified Overtime Pay under the OBBBA may also be incorrect. When employees earn non-discretionary bonuses tied to hours worked, both the regular rate and the half-time premium increase. The DOL's formal restatement of the non‑discretionary bonus rule in this Opinion Letter heightens the risk that any discrepancy between Qualified Overtime Pay and employee expectations could escalate into broader regular‑rate challenges and wage‑and‑hour claims.

Key Takeaway for Employers

In light of this Opinion Letter, employers may want to consider reviewing all bonus, premium, and incentive programs applicable to non‑exempt employees—including safety, attendance, quality, productivity, and retention bonuses—to determine which are deemed non‑discretionary under the DOL's framework—that is, tied to pre‑set criteria or formulas known in advance—and consult with counsel to ensure these bonus payments are calculated, paid and reported consistent with the FLSA and DOL guidance.

Because the IRS has encouraged employees to seek employer assistance in determining the amount of tax deductible OBBBA Qualified Overtime Pay for the 2025 tax year, employers may want to begin this analysis as soon as possible so that they are ready to coordinate employee communications on OBBBA inquiries. Employers may also wish to consider reviewing employee-facing documents (such as handbooks, bonus plan descriptions, offer letters) clearly and accurately documenting bonuses as discretionary or non-discretionary.

Footnote

1. Under longstanding DOL regulations (29 U.S.C. 778.109), "The regular hourly rate of pay of an employee is determined by dividing his total remuneration for employment (except statutory exclusions) in any workweek by the total number of hours actually worked by him in that workweek for which such compensation was paid." The half-time premium is calculated by multiplying the regular rate by 0.5 and applying that amount to overtime hours.

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