FLSA Regular Rate Exclusions: Bonuses, Perks, and Premium Pay

The Fair Labor Standards Act lets employers keep certain payments out of the regular rate used to compute overtime, and 29 U.S.C. § 207(e) is where those categories live. The main FLSA regular rate exclusions are gifts and truly discretionary bonuses, pay for time not worked, reasonable expense reimbursements, employer contributions to bona fide benefit plans, profit-sharing and qualifying stock option payments, statutory premium pay for weekend, holiday, or beyond-schedule work, call-back and reporting pay, and a defined set of workplace perks and wellness benefits. Everything else an employee earns during the workweek belongs in the numerator when you divide by hours worked to get the regular rate.¹

The distinctions matter on every payroll cycle. Miscount one category and the overtime rate is wrong for every hour worked over 40 that week, and back-pay exposure can double under the liquidated damages provision.

How the Regular Rate Is Built

Add up all compensation the employee earned during the workweek, subtract the statutory exclusions, and divide by total hours actually worked. That figure is the regular rate. Overtime hours are paid at one and a half times that number.¹ Hourly wages, salary, piece-rate pay, and commissions all go into the numerator by default. The breadth is intentional. Without it, employers could shift compensation into labels that dodge overtime.

Everything below is an exception to that default. If a payment doesn’t clearly fit one of the eight statutory categories, assume it goes into the regular rate.

Gifts and Discretionary Bonuses

Holiday gifts, birthday bonuses, and similar gestures of appreciation stay outside the regular rate when two conditions hold: the payment is a genuine gift for a special occasion, and the amount doesn’t depend on hours worked or productivity.² A flat $200 holiday bonus paid to every employee qualifies. A “holiday bonus” that scales with sales numbers doesn’t.

Discretionary bonuses get their own exclusion under a stricter test. Both the decision to pay and the amount must remain entirely at the employer’s discretion until at or near the end of the period. There can be no prior agreement, written or implied, that leads workers to expect the payment.³ The label on the check is irrelevant. An employer can call something a “discretionary bonus” every quarter for five years, and if employees have come to expect it, it isn’t discretionary anymore.

When a bonus fails the discretionary test, it becomes a nondiscretionary bonus that must be folded into the regular rate for every workweek it covers. If the bonus spans multiple weeks, the employer has to allocate it back across those weeks and pay additional overtime on the increased rate. Reasonable allocation methods include dividing the bonus equally across the weeks of the period or apportioning it to hours worked.⁴ This retroactive recalculation is where most bonus-related overtime violations happen. Employers assume the label controls and never revisit the math.

Sign-On and Retention Bonuses

A sign-on bonus can be excluded if it truly functions as a gift: not paid under a contract, and not so large that employees would reasonably view it as part of their wages. A modest one-time welcome payment generally qualifies. But if the sign-on bonus is required by a collective bargaining agreement or comes with a clawback clause tying repayment to continued employment, the Department of Labor treats it as compensation for work rather than a gift, and it must be included in the regular rate.⁵

Pay for Time Not Worked

Payments for vacation, holidays, sick leave, jury duty, bereavement, and similar absences are excluded because they aren’t compensation for hours of work.² The exclusion also reaches situations where the employer simply doesn’t provide enough work. If a worker takes three days of paid vacation in a 40-hour workweek, the vacation pay for those three days stays out of the calculation, and overtime is computed only on hours actually worked.

Payouts of unused paid leave, such as a year-end cash-out of accrued PTO, are also excluded. The DOL’s 2020 regulatory update confirmed this explicitly.⁶ Money paid for time not spent working doesn’t inflate the hourly rate used for overtime.

Expense Reimbursements

Repayments for business-related costs the employee incurs stay out of the regular rate as long as the amount reasonably approximates the actual expense.⁷ Common examples include mileage, travel, tools, and uniform cleaning. A reimbursement that tracks receipts or uses a standard per-mile rate is fine. Trouble starts when the “reimbursement” is disproportionately large compared to what the employee actually spent, because the excess gets reclassified as wages that belong in the regular rate.

There’s a useful safe harbor: any reimbursement that doesn’t exceed the federal per diem rates under the Federal Travel Regulation System or the IRS substantiation amounts is automatically treated as reasonable.⁷ Going above those rates doesn’t automatically make the reimbursement unreasonable, but it shifts the burden to the employer to justify the amount.

Remote Work and Cell Phone Stipends

Cell phone reimbursements are specifically listed in the regulations as excludable when they reflect the employee’s actual cost.⁸ Home internet reimbursements aren’t explicitly named, but the general principle applies. If the expense is incurred for the employer’s benefit and the reimbursement reasonably approximates the cost, it’s excludable. A flat $150 monthly remote work stipend that exceeds the employee’s actual internet and phone costs could have the excess portion treated as wages. Match documented costs or keep the amount modest enough that a disproportionality argument is unlikely.

Benefit Plan Contributions

Employer contributions to retirement, health insurance, life insurance, disability, and similar benefit plans are excluded when they’re irrevocably made to a trustee or third party under a bona fide plan.² The exclusion reaches plans covering medical expenses, hospitalization, accidents, unemployment, legal services, and other events that could cause significant financial hardship.¹ Employer contributions to a Health Savings Account or Health Reimbursement Arrangement fall within this category, since both are third-party or trust-based plans covering medical expenses.

The line between employer contributions and employee salary deferrals is critical. When an employee elects to defer part of their paycheck into a 401(k), that money was already earned as wages. The employer’s contribution is separate money flowing to a third party, which is why only the employer’s side stays out of the regular rate. The employee’s own deferral remains in the calculation.

Profit-Sharing Plans and Stock Options

Payments under a bona fide profit-sharing plan or thrift/savings plan can be excluded if the plan meets DOL regulatory requirements. The core test is whether the amounts paid are determined without regard to hours worked or productivity.⁹ A plan that distributes a percentage of company profits equally to all employees, or proportional to base salary, generally qualifies. A plan that scales payouts based on individual output looks like a production bonus and may fail.

Stock options, stock appreciation rights, and bona fide employee stock purchase programs have their own exclusion with detailed conditions. The exercise price must be at least 85 percent of the stock’s fair market value at the time of the grant. Options and appreciation rights can’t be exercisable for at least six months after grant, with exceptions for death, disability, retirement, or a change in corporate ownership. Participation must be voluntary, and the terms must be communicated to employees before they participate.⁹ When performance-based criteria determine who gets grants or how many shares, those criteria must apply to a business unit of at least ten employees or an entire facility, rather than singling out individuals.

Premium Pay for Overtime, Weekends, and Holidays

Extra compensation paid at a premium rate for work on weekends, holidays, the sixth or seventh day of a workweek, or hours beyond the normal workday is excluded from the regular rate. The statute covers three scenarios: hours beyond eight in a day or beyond the weekly maximum, work on weekends or holidays, and work outside the contractually established normal schedule.⁹ In each case the premium must be at least one and a half times the rate established in good faith for similar work during regular hours.

This is the one exclusion that also credits against overtime owed. If a worker earns a Sunday premium of $75 during a week they also work 44 hours, the employer can apply that $75 against the overtime owed for those four extra hours.⁹ Discretionary bonuses, vacation pay, benefit contributions, and every other excluded payment type reduce the regular rate but cannot offset separately owed overtime.

Workplace Perks and Wellness Benefits

The 2020 regulatory update clarified that many modern fringe benefits are excludable. The employer’s cost of providing the following stays out of the regular rate:¹⁰

Gym memberships, fitness classes, and on-site recreational facilities.
Wellness programs including health risk assessments, biometric screenings, vaccination clinics, nutrition and smoking cessation classes, stress reduction, mental health programs, and financial wellness counseling.
On-site treatment from chiropractors, massage therapists, physical therapists, personal trainers, and Employee Assistance Programs.
Tuition benefits, whether paid to the employee, an educational institution, or a student loan program.
Parking benefits, employee discounts on retail goods and services, adoption assistance, and on-the-job medical care.

The thread connecting these is that none of them are compensation for hours of employment, and none vary based on hours worked, productivity, or job performance. Tie a gym membership to a sales quota and you’ve turned a perk into a performance incentive, which pulls it back into the regular rate.

Call-Back and Reporting Pay

When an employee is called back to work after their shift ends without prior arrangement, any guaranteed minimum payment that exceeds pay for hours actually worked is excludable.¹¹ If a policy guarantees four hours of pay for any call-back but the employee only works two hours, the extra two hours of pay can be excluded. The call-back must not have been prearranged. If the employer anticipated needing extra workers and called them in instead of scheduling them in advance, the payment must be included.

Reporting pay works the same way. If an employee shows up for a scheduled shift and gets sent home early, the excess payment beyond what they earned for hours actually worked can be excluded.¹² Payments mandated by state or local scheduling laws, such as “predictability pay” for last-minute schedule changes, are also excludable as long as they aren’t compensation for hours worked.¹³ None of these excluded payments can be credited toward overtime. They reduce the regular rate denominator but don’t count as overtime already paid.

Payments That Must Be Included

Knowing what’s excluded matters less if you misidentify something that actually belongs in the calculation. The payments that trip employers up most often:

Shift differentials. Extra pay for night shifts, hazardous work, or unpleasant conditions must be included regardless of how it’s structured, whether as a flat dollar amount per hour or a percentage of the base rate. Employers sometimes confuse shift differentials with the statutory premium exclusion, but that exclusion only reaches extra pay for weekend, holiday, or beyond-normal-hours work at a rate of at least time and a half. A $2 per hour night differential doesn’t meet that threshold.¹⁴
Nondiscretionary bonuses. Any bonus announced in advance, tied to attendance, production, quality, or other performance metrics, or paid under a contract or policy, must go into the regular rate.⁴
Commissions. Whether paid weekly, monthly, or quarterly, commissions are part of the regular rate. The FLSA makes no exception.¹
On-call pay. Extra compensation for carrying a pager or phone and staying available to respond is included even if the employee is free to go about their personal business while on call.¹⁵

The shift differential mistake is especially common because the word “premium” appears in both contexts. A shift differential is extra pay for undesirable conditions. A statutory premium is extra pay at time-and-a-half or higher for working outside the normal schedule. They sound alike and function completely differently.

What a Miscalculation Costs

Every overtime check issued during a period of misclassification is short. The FLSA allows recovery of the unpaid back wages plus an equal amount in liquidated damages, effectively doubling the liability.¹⁶ Either the Secretary of Labor or the employee can bring the claim, and a private suit adds attorney’s fees and court costs on top of damages.

The statute of limitations is two years from when each paycheck was issued. If the violation was willful, that window stretches to three years.¹⁷ Willful doesn’t require intent to cheat. It means the employer knew the FLSA applied and disregarded it, or showed reckless disregard for whether their pay practices complied. Regular rate miscalculations often run for years before anyone catches them, so the three-year window frequently applies, and cumulative exposure across an entire workforce adds up fast.

1
U.S. Department of Labor. Fact Sheet 56A: Overview of the Regular Rate of Pay Under the Fair Labor Standards Act
2
Office of the Law Revision Counsel. 29 USC 207 – Maximum Hours
3
eCFR. 29 CFR 778.211 – Discretionary Bonuses
4
eCFR. 29 CFR 778.209 – Method of Inclusion of Bonus in Regular Rate
5
U.S. Department of Labor. Fact Sheet 56C: Bonuses Under the Fair Labor Standards Act
6
U.S. Department of Labor. Final Rule: Regular Rate Under the Fair Labor Standards Act
7
eCFR. 29 CFR 778.217 – Reimbursement for Expenses
8
eCFR. 29 CFR Part 778 Subpart C – Payments That May Be Excluded From the Regular Rate
9
Office of the Law Revision Counsel. 29 USC 207 – Maximum Hours
10
eCFR. 29 CFR 778.224 – Other Similar Payments
11
eCFR. 29 CFR 778.221 – Call-Back Pay
12
eCFR. 29 CFR 778.220 – Show-Up or Reporting Pay
13
eCFR. 29 CFR 778.222 – Other Payments Similar to Call-Back Pay
14
eCFR. 29 CFR 778.207 – Premium Pay
15
eCFR. 29 CFR 778.223 – Pay for Non-Productive Hours
16
U.S. Department of Labor. Back Pay
17
Office of the Law Revision Counsel. 29 USC 255 – Statute of Limitations