The U.S. Department of Labor (DOL) recently issued guidance that gives employers more flexibility when designing bonus programs for nonexempt employees. In Opinion Letter FLSA2026-6, the DOL endorsed a bonus structure that allows employers to establish a bonus pool after a performance period has ended while still avoiding the complex overtime recalculations that often accompany nondiscretionary bonuses. For employers seeking to reward employees while maintaining greater control over labor costs, the guidance provides a potentially valuable compliance tool.
Why Bonus Programs Create Overtime Challenges
Under the Fair Labor Standards Act (FLSA), most nondiscretionary bonuses must be included in an employee’s regular rate of pay when calculating overtime. As a result, employers frequently must recalculate overtime earnings and pay additional overtime amounts after bonuses are awarded—a process that can be administratively burdensome, especially when bonuses are earned over several months or an entire year.
Historically, employers could avoid these additional calculations by paying a bonus as a percentage of an employee’s total earnings, including overtime earnings. Because the bonus automatically increased along with overtime pay, the overtime component was considered already included.
The downside? Employers often could not predict the total cost of the program until the performance period ended.
The New Bonus Pool Approach
The DOL has now confirmed that employers may establish a total bonus pool after the performance period concludes and distribute the funds proportionally based on each employee’s share of total earnings. For example, if an employer establishes a $100,000 bonus pool and an employee earned 5% of the total earnings of all eligible participants during the performance period, that employee would receive 5% of the bonus pool.
This approach allows employers to determine the total amount they wish to spend on bonuses after reviewing financial results, rather than committing to an unknown payout amount in advance.
What Employers Need to Know
The DOL emphasized that employers cannot use this structure to avoid overtime obligations. To remain compliant:
- Bonus calculations must be genuinely tied to employee earnings.
- Employers cannot simply assign fixed bonus amounts and retroactively label them as percentage-based bonuses.
- Certain payments that are excluded from the regular rate of pay, such as discretionary bonuses and expense reimbursements, generally cannot be included when calculating bonus percentages.
- Bonus plans should be carefully structured and documented before implementation.
Forework Takeaway
This guidance provides employers with a valuable opportunity to balance employee incentives with budget certainty. However, bonus structures involving nonexempt employees remain one of the most common areas for wage-and-hour mistakes. Employers should review existing bonus programs to ensure they comply with both federal and state overtime requirements before implementing any new compensation strategy.