One of the more surprising changes in the new FLSA overtime exemption rules is a provision allowing certain bonuses, commissions, and incentive pay to count for up to 10% of the new increased minimum salary level. However, the rule provides that only “nondiscretionary” bonuses, incentives, and commissions can be counted. So what exactly does “nondiscretionary” mean?

The new rules don’t actually define “nondiscretionary,” but another part of the FLSA regulations (specifically 29 C.F.R. § 778.211), provides some guidance here. That section discusses which bonuses can be excluded from the “regular rate” used to calculate overtime for non-exempt employees because they are discretionary:

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. 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.

In sum, a bonus not “discretionary” under this rule if an employer either commits in advance to paying a bonus, or states the amount of the bonus or method of calculation in advance. That covers pretty much any bonus paid by an employer under a previously announced bonus or incentive plan, arguably even one in which the employer nominally retains “discretion” to adjust or withhold bonuses up until the time of payment.

One would expect the DOL and the courts to interpret the term “nondiscretionary” in the new exemption rules in a similar manner. However, the new rules don’t expressly incorporate or reference the language from § 778.211. Because the DOL and courts tend to construe the exemptions narrowly, it is at least conceivable that the Department or a court could take the position that a bonus plan in which an employer retains discretion to adjust or deny payments is “discretionary” for purposes of this rule.

Unfortunately this is one of those details that we’ll need further guidance and possibly litigation to sort out definitively. In the meantime, a conservative approach would be to count only those bonuses, commissions and incentive payments that are contractually guaranteed to employees toward the minimum salary under the new exemption rules.