[Code of Federal Regulations]
[Title 29, Volume 3]
[Revised as of July 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 29CFR778.211]

[Page 419-420]
 
                             TITLE 29--LABOR
 
         CHAPTER V--WAGE AND HOUR DIVISION, DEPARTMENT OF LABOR
 
PART 778_OVERTIME COMPENSATION--Table of Contents
 
    Subpart C_Payments That May Be Excluded From the ``Regular Rate''
 
Sec. 778.211  Discretionary bonuses.

    (a) Statutory provision. Section 7(e) (3)(a) of the Act provides 
that the regular rate shall not be deemed to include ``sums paid in 
recognition of services performed during a given period if * * * (a) 
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 * * *''. 
Such sums may not, however, be credited toward overtime compensation due 
under the Act.
    (b) Discretionary character of excluded bonus. In order for a bonus 
to qualify for exclusion as a discretionary bonus under section 
7(e)(3)(a) the employer must retain discretion both as to the fact of 
payment and as to the amount until a time quite close to the end of the 
period for which the bonus is paid.

[[Page 420]]

The sum, if any, to be paid as a bonus is determined by the employer 
without prior promise or agreement. The employee has no contract right, 
express or implied, to any amount. If the employer promises in advance 
to pay a bonus, he has abandoned his discretion with regard to it. Thus, 
if an employer announces to his employees in January that he intends to 
pay them a bonus in June, he has thereby abandoned his discretion 
regarding the fact of payment by promising a bonus to his employees. 
Such a bonus would not be excluded from the regular rate under section 
7(e)(3)(a). Similarly, an employer who promises to sales employees that 
they will receive a monthly bonus computed on the basis of allocating 1 
cent for each item sold whenever, is his discretion, the financial 
condition of the firm warrants such payments, has abandoned discretion 
with regard to the amount of the bonus though not with regard to the 
fact of payment. Such a bonus would not be excluded from the regular 
rate. On the other hand, if a bonus such as the one just described 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.
    (c) Promised bonuses not excluded. The bonus, to be excluded under 
section 7(e)(3)(a), must not be paid ``pursuant to any prior contract, 
agreement, or promise.'' For example, any bonus which is promised to 
employees upon hiring or which is the result of collective bargaining 
would not be excluded from the regular rate under this provision of the 
Act. Bonuses 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. Attendance 
bonuses, individual or group production bonuses, bonuses for quality and 
accuracy of work, bonuses contingent upon the employee's continuing in 
employment until the time the payment is to be made and the like are in 
this category. They must be included in the regular rate of pay.