Varnum recently hosted a webinar addressing employee bonuses, overtime calculations, Fair Labor Standards Act (FLSA) compliance, and new reporting obligations under the One Big Beautiful Bill Act (OBBBA). The program provided practical guidance for HR professionals, payroll administrators, and employers managing wage and hour compliance obligations in 2026 and beyond.
Below are key takeaways regarding overtime pay requirements, nondiscretionary bonuses, and OBBBA reporting obligations.
Why Bonus and Overtime Compliance Matters
Many employers use bonuses to support employee retention, productivity, and performance goals. However, under the FLSA, certain bonuses must be included in an employee’s regular rate of pay when calculating overtime compensation.
At the same time, the OBBBA introduces new payroll reporting requirements related to qualified overtime compensation and qualified tips for tax years 2025 through 2028. Employers should review payroll systems and compensation practices now to reduce compliance risks.
FLSA Overtime Rules and the Regular Rate of Pay
The FLSA requires nonexempt employees to receive overtime pay at one and one-half times their regular rate of pay for hours worked over 40 in a workweek. A workweek is typically a fixed and recurring period of 168 hours. Compensable time may include work performed at home, travel time, waiting time, training, and probationary periods.
The regular rate of pay is not always the same as an employee’s hourly wage. Under the FLSA, the regular rate generally includes most forms of compensation and is calculated by dividing total included compensation by the total hours worked during the workweek.
Because the regular rate affects overtime calculations, employers should carefully evaluate whether bonuses and incentive payments must be included.
Discretionary vs. Nondiscretionary Bonuses
Whether a bonus must be included in the regular rate calculation depends on whether it is discretionary or nondiscretionary.
Discretionary Bonuses
Discretionary bonuses, where the employer retains genuine discretion over both the fact and amount of payment, are excluded from the regular rate. Examples include employee-of-the-month awards, severance bonuses, and bonuses for extraordinary efforts not tied to pre-established criteria.
Nondiscretionary Bonuses
Nondiscretionary bonuses generally must be included in overtime calculations because they are tied to measurable expectations or communicated in advance to employees. Common examples include production, attendance, quality, and safety bonuses.
The Department of Labor considers bonuses nondiscretionary when they are intended to encourage employees to work more steadily, rapidly or efficiently, or to remain employed.
Labels alone are not determinative. A bonus described as “discretionary” may still qualify as nondiscretionary if employees expect payment based on established criteria, prior practice, or other communications from the employer.
How Bonuses Affect Overtime Calculations
When a nondiscretionary bonus applies to a single workweek, the employer must include the bonus in the employee’s regular rate calculation for that week to determine whether additional overtime compensation is owed.
More complex issues arise when bonuses cover multiple workweeks, such as quarterly or annual bonuses. In those situations, the bonus generally must be allocated across the workweeks in which it was earned using a reasonable and equitable method. Employers may then owe additional overtime compensation for weeks in which overtime was worked.
If overtime is paid before the final bonus amount is known, the employer may initially calculate overtime without the bonus. Once the bonus amount is finalized, however, the employer must recalculate overtime and issue any additional overtime pay owed.
Employers cannot avoid overtime obligations simply because a bonus is paid later.
OBBBA Reporting Requirements
The OBBBA created new federal tax deductions for qualified overtime compensation and qualified tips for tax years 2025 through 2028.
The updated 2026 Form W-2 includes new Box 12 reporting instructions related to these deductions. Employers should confirm payroll systems are configured to separately track and report qualifying compensation.
Qualified overtime compensation does not include all overtime pay. In general, it includes only the premium half-time portion required under Section 7 of the Fair Labor Standards Act for hours worked over 40 in a workweek.
Qualified overtime compensation generally does not include:
- Overtime paid under collective bargaining agreements
- Overtime required solely by employer policy
- Contract-based overtime arrangements
- Overtime paid under more generous state or local standards
Employers with Michigan employees should review Michigan House Bill 4961, a recent law which applies a similar “no tax on overtime and tips” concept to Michigan state income tax for tax years 2026 through 2028.
Common Wage and Hour Compliance Mistakes
HR and payroll teams should remain alert to several common FLSA compliance risks, including:
- Excluding nondiscretionary bonuses from overtime calculations
- Failing to recalculate overtime after deferred bonus payments
- Misclassifying all overtime pay as qualified overtime compensation under the OBBBA
- Failing to coordinate among HR, payroll, finance and legal teams
- Relying on bonus labels instead of analyzing actual payment structure and employee expectations
Next Steps for Employers
Employers should review bonus structures, overtime calculation procedures, and payroll reporting systems to confirm compliance with the FLSA and OBBBA requirements.
For questions regarding overtime compliance, bonus structures, or OBBBA reporting obligations, please contact a member of Varnum’s Labor and Employment Practice Team.
