FLSA2005-4NA — Bonus payments included in regular rate of pay

U.S. Department of Labor
Employment Standards Administration
Wage and Hour Division
Washington, D.C. 20210

July 5, 2005
FLSA2005-4NA
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Dear Name*,

This is in response to your letter to the Baltimore Wage and Hour Division Office concerning the
application of the overtime provisions of the Fair Labor Standards Act (FLSA). You ask whether a bonus
paid by an employer for sale of a vendor’s products must be included in an employee’s regular rate for
overtime, if the amount and nature of the bonus are determined by the vendor. Your letter was forwarded
to this office for a reply. It is our opinion that the bonus must be included in the regular rate of pay.

You describe an employer whose employees sell products from several vendors. You state that
occasionally “a vendor sponsors a bonus program relating to its products....The vendor then pays to the
employer the bonus earned by each employee based upon the vendor’s established formula. The
employer, in turn, pays the employees the vendor’s bonus.” The vendor decides if and when to provide
these bonuses and how to calculate the amount each employee will receive. You indicated in a
conversation with a member of my staff that the vendor announces the bonus to employees prior to the
employees selling the vendor’s product. The employees then receive the bonuses after the services are
performed for the vendor.

The regular rate of pay is deemed by section 7(e) of the FLSA, 29 U.S.C. § 207(e), copy enclosed, “to
include all remuneration, for employment paid to, or on behalf of, the employee,” except those specifically
excluded in this section. Section 7(e)(3)(a) excludes bonuses from the regular rate of pay if “both the fact
that payment is to be made and the amount of the payment are determined at the sole discretion of the
employer at or near the end of the period and not pursuant to any prior contract, agreement, or promise
causing the employee to expect such payments regularly.” Since the vendor informs the employees of
the requirements for the bonus prior to the work being performed, these bonuses are promised to the
employees who meet the vendor’s requirements, rather than being paid at the discretion of the employer.
Additionally, 29 C.F.R. § 778.211(c), copy enclosed, states that “[b]onuses which are announced to
employees to induce them to work more steadily or more rapidly or more efficiently or to remain with the
firm are regarded as part of the regular rate of pay.” As the Wage and Hour Division’s Field Operations
Handbook (FOH) explains, extra payments from manufacturers or distributors to the sales employees of a
retail establishment for selling certain items or brands are wages that must be included in the regular rate.
FOH ¶ 32b07, copy enclosed. Consequently, the bonus you describe should be included in the regular
rate of pay for overtime purposes.

Please note that 29 C.F.R. § 778.211(b) describes the conditions that must be met for a bonus to qualify
as an exclusion from the regular rate as a discretionary bonus. It concludes by stating that “[o]n the other
hand, if a bonus [based upon the quantity of sales made by an employee] were paid without prior
contract, promise or announcement and the decision as to the fact and amount of payment lay in the
employer’s sole discretion, the bonus would be properly excluded from the regular rate.” The bonus you
described does not satisfy this condition and must be included in the calculation of the employee’s regular
rate of pay.

Additionally, you ask how to calculate the bonus into the regular rate of pay. 29 C.F.R. § 778.209 and
FOH ¶ 32c03, copies enclosed, provide guidance on the method of calculating the regular rate of pay
when bonuses are to be included.

This opinion is based exclusively on the facts and circumstances described in your request and is given
on the basis of your representation, express or implied, that you have provided a full and fair description
of all the facts and circumstances that would be pertinent to our consideration of the question presented.
Existence of any other factual or historical background not contained in your request might require a
different conclusion than the one expressed herein. You have represented that this opinion is not sought
by a party to a pending private litigation concerning the issue addressed herein. You have also

U.S. Department of Labor
Employment Standards Administration
Wage and Hour Division
Washington, D.C. 20210

represented that this opinion is not sought in connection with an investigation or litigation between a client
or firm and the Wage and Hour Division or the Department of Labor.

We trust the above information is responsive to your inquiry.

Sincerely,

Barbara R. Relerford
Office of Enforcement Policy
Fair Labor Standards Team

Enclosures:
FLSA section 7(e)
29 C.F.R. 778.209, .211
FOH ¶ 32b07, 32c03

* Note: The actual name(s) was removed to preserve privacy in accordance with 5 U.S.C. 552 (b)(7).

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