Every quarter, a small sales-driven business pays out a bonus pool tied to revenue. Payroll runs the numbers, checks go out, and everyone moves on — until a departing employee's lawyer points out that the bonus never got folded back into the overtime rate for the quarter it covered. Suddenly a routine incentive program looks like two years of underpaid overtime, doubled as liquidated damages, plus attorneys' fees.
That scenario is common enough that the U.S. Department of Labor's Wage and Hour Division just spent an entire opinion letter explaining, in granular detail, one way to avoid it. Opinion Letter FLSA2026-6, issued May 28, 2026, confirms that a properly structured quarterly bonus can satisfy the Fair Labor Standards Act's overtime requirements automatically — no separate recalculation, no retroactive checks, no exposure. But "properly structured" is doing a lot of work in that sentence, and most employers who think they qualify actually don't.
The problem this letter solves
Under the FLSA, nearly every bonus tied to performance, sales, production, or attendance is "nondiscretionary" — meaning it has to be added into an employee's regular rate of pay before overtime is calculated. The standard mechanism for doing that, laid out in the Department's long-standing regulations, is brutal in practice: you take the bonus, allocate it back across the workweeks it covers, recompute the regular rate for each of those weeks, and cut a supplemental overtime check for the difference. A quarterly bonus can mean recalculating thirteen separate workweeks, one employee at a time, every single quarter.
The DOL has always recognized one narrow exception. Under 29 CFR § 778.210, a bonus that is calculated as a fixed percentage of an employee's total earnings — straight-time and overtime combined — already contains the correct overtime premium baked into the math. No recomputation is required, because the formula itself scales proportionally with however much overtime the employee actually worked.
FLSA2026-6 is the Department walking through a real employer's bonus plan and confirming, line by line, that it clears that bar.
How the approved bonus plan actually works
The employer in the opinion letter ran a straightforward sales-incentive program:
- At the close of each quarter, the employer tallies the eligible employees and the total bonus pool, driven by quarterly sales revenue.
- Payroll generates a "gross earnings" report for the quarter — critically, this includes both straight-time and overtime pay each eligible employee earned during those thirteen weeks.
- Each employee's share of the bonus pool is calculated as the percentage their own gross earnings represent of the total gross earnings paid to everyone in the pool.
A simplified version: if the quarterly bonus pool is $100,000, and one employee's total straight-time-plus-overtime earnings for the quarter equal 5% of everyone's combined earnings, that employee gets a $5,000 bonus. Because overtime pay was already part of the denominator and numerator, the resulting bonus check already reflects a proportionally larger share for the employee who worked more overtime — which is exactly what a supplemental overtime recalculation would have produced anyway, just without the extra math.
The DOL's conclusion: this structure is a valid "percentage of total earnings" bonus. The employer does not need to recompute the regular rate or issue a second overtime check when the bonus goes out.
The four conditions that actually matter
The relief in FLSA2026-6 is not a blanket exemption for "any bonus calculated as a percentage." The letter is specific about what breaks the exception, and any one of these four issues can knock a plan out of compliance:
- Overtime pay must be part of the calculation base. If the bonus percentage is applied only to straight-time earnings and ignores overtime hours entirely, the resulting bonus under-compensates employees who worked more overtime — and a separate recalculation becomes necessary after all.
- The percentage must be applied evenly. A plan cannot apply a higher percentage bump to straight-time earnings than to overtime earnings. Any structural favoritism toward straight-time pay defeats the proportionality the exception relies on.
- The earnings base can't be padded with excluded pay. Items that were already properly excluded from the regular rate — discretionary bonuses, expense reimbursements, employer benefit-plan contributions — can't be folded into the "total earnings" figure used to calculate the percentage. Doing so distorts the math the exception depends on.
- The bonus can't shrink as overtime rises. A formula that pays a smaller percentage (or smaller total bonus) the more overtime an employee racks up is, in the Department's words, treated as a device to evade the overtime requirement — regardless of what the plan is called internally.
Miss any one of these and the "percentage of total earnings" label doesn't hold, which means the underlying nondiscretionary bonus goes right back to requiring the standard workweek-by-workweek recalculation.
Why this matters even for a small team
It's tempting to file this under "big-company payroll trivia," but the exposure scales down just as easily as it scales up. A ten-person shop paying quarterly sales bonuses has the exact same recalculation obligation as a thousand-person company — it just shows up in smaller absolute dollars and gets noticed less often, right up until a single departing employee's attorney runs the numbers.
The stakes are real. Employment counsel who track this area note that a bonus program that fails to properly fold nondiscretionary pay into the regular rate can trigger a payroll audit reaching back several years, with exposure that stacks: the unpaid overtime premium itself, an equal amount in liquidated damages, civil penalties, and attorneys' fees on top. Courts have also shown a willingness to certify these as class or collective claims when a company applies the same flawed bonus formula uniformly across its workforce — meaning one bad formula can turn into one claim per bonus-eligible employee, going back years, in a single case.
For a business already stretched thin on HR bandwidth, the appeal of FLSA2026-6 is obvious: get the formula right once, and an entire category of quarterly payroll risk disappears. Get it wrong — say, by excluding overtime from the calculation base, or applying a cap that effectively shrinks the bonus for high-overtime employees — and the exception provides zero protection, while the bonus program itself becomes the paper trail proving the underpayment.
A practical checklist before your next bonus run
If your business pays a quarterly, or any periodic, bonus tied to sales, production, or performance, it's worth running the plan through this test before the next payout:
- Does the bonus pool calculation explicitly include both straight-time and overtime earnings for every eligible employee?
- Is the percentage applied identically to straight-time and overtime portions of earnings — no tilt toward straight time?
- Does the "total earnings" figure exclude anything that's properly excluded from the regular rate (discretionary bonuses, reimbursements, benefit contributions)?
- Would an employee who worked significantly more overtime in a given quarter end up with a larger bonus share, not a smaller one, all else equal?
If the answer to all four is yes, the plan likely fits inside the § 778.210 exception the DOL just reaffirmed. If any answer is no — or if you're not sure how your current formula would answer — that's a signal to get the plan reviewed before the next quarterly distribution, not after an employee's exit interview turns into a demand letter.
It's also worth remembering that an opinion letter interprets federal law only. States with their own wage-and-hour regimes — California chief among them — don't automatically defer to DOL guidance, so a plan that clears the federal bar may still need a separate look under state law before you rely on it.
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