DOL Opinion Letter FLSA2026-2: When a "Discretionary" Bonus Isn't — and What It Does to Overtime Pay

A waste-management company pays its drivers a base hourly rate, plus up to $9.50 an hour more if they hit safety, punctuality, and job-duty targets. The company calls it a discretionary bonus program. The Department of Labor looked at the same plan and said: no, it isn't — and every overtime check you've cut under that assumption is short.

That's the real-world scenario behind Opinion Letter FLSA2026-2, issued by the Wage and Hour Division on January 5, 2026. It's not a new rule — the underlying law hasn't changed — but it's a sharp reminder that the word "bonus" on a pay stub doesn't decide anything. What decides it is whether the employer actually kept discretion over the payment, and most bonus plans built around a formula quietly gave that discretion away years ago.

The Bonus Plan the DOL Reviewed​

The employer's drivers earned a base hourly wage plus incentive pay tied to three categories: safety (no preventable accidents, following protocols), job duties (completing routes, proper equipment handling), and performance (attendance, punctuality). Hit the criteria in a given period, and the bonus — worth as much as $9.50 for every hour worked that week — was paid automatically. No manager had to sign off on whether the driver "deserved" it that particular week; the criteria decided it.

The employer asked WHD to confirm the bonus could be excluded from the regular rate of pay used to calculate overtime, on the theory that judgment calls were still involved — was a returned vehicle actually "clean"? Did a near-miss count as a safety violation? DOL's answer: that kind of interpretive judgment doesn't matter. What matters is whether the fact and amount of the payment were determined by a preset formula rather than the employer's discretion at the time of payment. Here, they were. Bonus in, overtime math changes.

The Three-Part Test That Actually Controls​

Section 7(e)(3) of the Fair Labor Standards Act lets employers exclude genuinely discretionary bonuses from the "regular rate" — the number overtime is calculated from. But the exclusion is narrow, and a bonus only qualifies if all three of these are true:

1. Both the fact and the amount of the payment are determined at the employer's sole discretion. Not "mostly discretionary." Not "discretionary except for the formula that triggers it." Sole discretion, on both whether to pay and how much.
2. The decision is made at or near the end of the period the bonus covers. If the amount is knowable in advance because it's tied to a formula, this fails — it doesn't matter that a check gets cut later.
3. The payment isn't made under any prior contract, agreement, or promise that would lead an employee to expect it. If you told employees about the bonus criteria in advance — which almost every incentive program does, because otherwise it doesn't motivate anyone — you've likely already failed this prong.

DOL's language in the letter is blunt: once an employer sets criteria that automatically triggers a quantifiable bonus when met, the employer has effectively "abandoned" its discretion over both the fact and amount of the payment. Announcing the rules to employees in advance is exactly what most incentive programs do to make them work as incentives — and it's exactly what disqualifies them from the discretionary exclusion.

Why This Trips Up Employers Constantly​

Nobody names a bonus plan "Nondiscretionary Incentive Program." Employers call these things "discretionary" in the plan document because that's the word they associate with flexibility and goodwill, not because anyone ran the three-part test. In practice, most recurring incentive pay fails at least one prong:

• Attendance and punctuality bonuses — nondiscretionary. Formula-driven, expected, must be included.
• Production and quota bonuses — nondiscretionary. Same reasoning: hit the number, get the payment.
• Safety bonuses (days without an incident, completed safety checklists) — nondiscretionary, per this exact opinion letter.
• Retention/longevity bonuses — nondiscretionary. Tied to tenure criteria the employee can rely on.
• Referral bonuses — nondiscretionary once the referral converts per the stated terms.
• Holiday or year-end bonuses — it depends entirely on pattern. A true surprise, sole-discretion holiday gift is excludable. The same bonus paid every December in a similar amount, year after year, becomes something employees reasonably expect — and expectation is disqualifying even without a written formula.
• True spot bonuses — a manager decides, unprompted and un-preannounced, to reward one employee for an unusual effort. This is the closest thing to genuinely discretionary bonus pay, precisely because nothing about it was promised or predictable in advance.

The dividing line isn't generosity or the employer's intent — it's predictability. If an employee could reasonably calculate in advance "if I do X, I get Y," the bonus almost always belongs in the regular rate.

What Happens to the Overtime Math​

This isn't a compliance technicality with no dollar impact — it changes the actual overtime premium owed. DOL's own example from the letter:

An employee works 50 hours in a week at a $12/hour base rate, earning the full $9.50/hour bonus for all 50 hours.

• Straight-time pay: (50 × $12) + (50 × $9.50) = $600 + $475 = $1,075
• Regular rate: $1,075 ÷ 50 hours = $21.50/hour (not $12)
• Overtime premium: half the regular rate × 10 overtime hours = $10.75 × 10 = $107.50 in additional pay owed, on top of what a base-rate-only calculation would have produced

If that employer had been treating the bonus as excludable — using $12 as the regular rate instead of $21.50 — every overtime hour for every driver on that plan was underpaid, every single week the bonus was earned. Multiply that across a pay period, a year, and a workforce, and you're looking at a back-pay exposure that compounds fast, before liquidated damages or attorneys' fees even enter the picture.

What to Actually Do About It​

1. Pull every bonus, incentive, and commission plan you run and test it against the three prongs above. Not the plan's name — its mechanics. Does a formula determine the amount? Was it announced in advance? Is the payment automatic once criteria are met? Two "yes" answers to those questions usually means nondiscretionary.
2. Recalculate the regular rate for any nondiscretionary bonus period retroactively if you've been excluding it. The bonus generally has to be allocated back over the workweeks it was earned, not just the week it was paid, which is its own common error.
3. Fix the plan language and the payroll calculation together. Renaming a plan "discretionary" doesn't make it so if the mechanics don't match — and mislabeling it can look worse in an audit than simply getting the math wrong.
4. Train whoever runs payroll on the difference between "the bonus involves some judgment calls" (irrelevant to the test) and "the employer retains discretion over whether and how much to pay" (the actual test).
5. Document genuinely discretionary payments as such at the time you decide to pay them — a contemporaneous note that a bonus was unplanned and unpromised is worth far more in a wage-and-hour audit than after-the-fact characterization.

Keep the Bonus Math Auditable​

This is exactly the kind of rule that's easy to get wrong quietly, because the bonus still gets paid and employees don't complain about receiving money — they just don't know their overtime premium was calculated on the wrong base rate. That's a much harder thing to catch in a spreadsheet built for speed, not scrutiny. Beancount.io keeps payroll, bonus accruals, and regular-rate calculations in plain-text ledgers you can inspect line by line and diff over time — so when a rule like FLSA2026-2 changes how a bonus should be classified, you can see exactly which pay periods and which employees are affected, not just trust that the payroll software got it right. Get started for free and keep your compensation records as auditable as your books.