November 20, 2025
Client Alert: Understanding Discretionary vs. Non-Discretionary Bonuses – Key Considerations for Employers
Employers who pay bonuses should make clear whether they are discretionary or non-discretionary to reduce the risk of wage claims.
What are discretionary or non-discretionary bonuses?
Discretionary Bonuses
- Payable at the employer’s discretion.
- Employers have full control over whether and when to pay these bonuses.
- Not required by any agreement, formula or promise.
- Examples include year-end holiday bonuses or exceptional performance awards.
Non-Discretionary Bonuses
- Payable if/when specific criteria are met.
- Once the criteria are satisfied, the employer is obligated to pay the bonus.
- Typically outlined in an employment contract, handbook, or incentive plan.
- Examples of criteria are sales quotas or performance targets.
Legal Implications
- Simply labeling a bonus as discretionary does not make it so.
- Discretionary bonuses are not considered regular wages, making them less likely to trigger wage claims.
- Non-discretionary bonuses are considered part of regular wages and must be included in overtime calculations for the relevant period. Employers must allocate part of a non-discretionary bonus to each workweek, recalculate the overtime rate, and pay any difference owed.
Clear documentation and communication of bonus policies can help employers minimize legal risk and ensure compliance with wage and hour laws.
How Book Law Can Help
Not sure whether your bonus program is discretionary or non-discretionary? Need help evaluating whether a bonus payment has overtime implications? Book Law assists employers in drafting and reviewing bonus policies and employment agreements for compliance with federal and state wage laws.
If you have questions about bonus structures or other wage and hour laws, please reach out to Chaim Book at cbook@booklawllp.com, Sheryl Galler at sgaller@booklawllp.com, Rebecca Nathanson at rnathanson@booklawllp.com, or Jared Nossen at jnossen@booklawllp.com.
