Understanding Discretionary Bonus 

Under the Fair Labor Standards Act (FLSA), "discretionary" bonuses are unique because they are excluded from an employee’s Regular Rate of Pay (RRP).

For a bonus to be discretionary and excluded from overtime calculations, it must meet three statutory requirements:

1. Sole Discretion of the Employer: The employer must retain sole power to decide if the payment will be made and how much it will be.

2. Timing of the Decision: The decision to pay the bonus must be made at or near the end of the period for which the bonus is paid.

3. No Prior Expectation: The bonus cannot be paid according to any prior contract, agreement, or promise that would cause an employee to expect the payment regularly.

What’s Discretionary vs. Non-Discretionary

Excluded (Discretionary)

1. On the spot bonuses for unexpected extra effort.

2. Gifts for holidays or special occasions (not tied to hours worked).

3. Employee of the month awards given based on subjective merit.

4. Referral bonuses (provided recruiting is not the primary job).

Included (Non-Discretionary)

1. Production or incentive bonuses tied to specific targets.

2. Attendance bonuses for perfect punctuality or zero absences

3. Safety bonuses for reaching specific safety milestones.

4. Retention bonuses promised for staying with the company for a set time.