Employers that provide non-exempt employees bonuses, incentive pay, commissions, retention or sign-on awards, or equity restricted stock units (“RSUs”) should confirm if the Fair Labor Standards Act (“FLSA”) requires inclusion of that compensation in pay when computing the “regular rate” used to calculate overtime. Unless a payment fits within one of the FLSA’s narrow statutory exclusions—and the arrangement is designed and administered to meet every condition of that exclusion—the employer must add the compensation to the regular rate when computing overtime. Paying time-and-a-half on the base hourly wage alone is a common and costly error.
The Governing Rules: Bonus & Other Compensation Includable Unless Employer Proves Compensation Meets Exemption Requirements
The FLSA requires employers to pay non-exempt employees overtime pay of not less than one and one-half times the employee’s “regular rate” for hours over 40 in a workweek. The “regular rate” includes all remuneration for employment, except remuneration that the employer proves meets all requirements to qualify as exempt under Section 7(e) of the FLSA. The regular rate reflects actual pay facts and cannot be set by agreement. Excluded payments generally cannot be credited toward overtime owed unless the statute specifically permits it. DOL Fact Sheet #56C.
The evidence of the facts and circumstances, not how the employer labels the arrangement, determines if the added compensation qualifies as exempt. DOL Fact Sheet #56A.
As illustrated by the recent litigation in Costa v. Apple Inc., No. 3:23-cv-01353-WHO (N.D. Cal.), equity, cash and other bonus or incentive compensation tied to production, attendance, safety, quality, retention, or other announced criteria are nondiscretionary and generally must be included. A “discretionary” label does not control. See DOL Fact Sheet #56C; 29 C.F.R. § 778.211.
The U.S. Department of Labor (DOL) reaffirmed these rules in Opinion Letter FLSA 2026-2 (Jan. 5, 2026) and continues to recover back wages from employers that leave nondiscretionary bonuses out of overtime calculations.
Mistakes are costly for employers because FLSA exposure can be enforced by the Labor Department or litigated on a class action basis, reach back two years (three if willful), and awards include actual denied overtime pay plus an equal amount in liquidated damages and plaintiffs’ attorneys’ fees.
Cash, Equity & Other Incentive Compensation Includable Unless Specific Exemption Requirements Met
Many employers mistakenly overestimate their ability to exclude cash, equity or other incentive compensation from the regular rate of pay when paying non-exempt hourly workers. Employers must be able to prove that this additional compensation needs all of the requirements of a specific exemption under section 7(e) of the FSLA. The following are the most common exemptions potentially available for bonus or other incentive compensation and their applicability depend on the employer being able to prove the remuneration meets all applicable conditions.
- Discretionary Bonuses: All Three Conditions Must Be Met. A bonus is excludable as discretionary under 29 U.S.C. § 207(e)(3) only if (1) the employer retains sole discretion, until at or near the end of the period the bonus covers, over whether to pay it; (2) the employer likewise retains sole discretion over the amount; and (3) the payment is not made under any prior contract, agreement, or promise that causes employees to expect it regularly. 29 C.F.R. § 778.211; DOL Fact Sheet #56C. If the employer announces or promises a bonus in advance, it has given up that discretion. DOL identifies as examples of nondiscretionary (includable) bonuses those based on a predetermined formula such as individual or group production; quality and accuracy bonuses; bonuses announced to encourage efficiency; attendance bonuses; and safety bonuses. Examples that may be discretionary if all conditions are met include unplanned awards for overcoming a challenging situation, employee-of-the-month awards, severance bonuses, and certain referral bonuses. The fact that an employer could decline to pay a promised bonus does not make it discretionary. DOL Fact Sheet #56C.
- Gifts, Holiday, Longevity, and Sign-On Payments. Gifts and special-occasion payments may be excluded if their amounts are not measured by or dependent on hours worked, production, or efficiency. Longevity and sign-on bonuses can qualify, but not when paid under a contract or when they are so substantial that employees likely regard them as part of their wages; sign-on bonuses with clawbacks paid under a collective bargaining agreement, ordinance, or policy must be included. DOL Fact Sheet #56C. Year-end “holiday” bonuses that are paid every year or computed as a percentage of pay are frequent trouble spots.
- Equity Compensation. Section 7(e)(8), added by the Worker Economic Opportunity Act of 2000, excludes value or income from qualifying employer-provided stock options, stock appreciation rights, and bona fide employee stock purchase programs—but only when statutory conditions concerning program terms, communication to employees, timing of exercisability, pricing, and the basis on which grants are made are satisfied.
- RSUs are not expressly listed, which is the core dispute in Costa. The Valuing Employee Stock Today Act, H.R. 8660, 119th Cong., introduced May 4, 2026, would amend Section 7(e)(8) to add restricted stock unit programs to the exclusion. Unless and until Congress acts or the Ninth Circuit affirms, employers granting RSUs to non-exempt workers should treat inclusion risk as live—particularly outside the Ninth Circuit.
When not excludable, a nondiscretionary bonus or other incentive compensation earned over a month, quarter, or year must be allocated back across the workweeks it covers, and additional overtime must be paid for each overtime week in that period. 29 C.F.R. § 778.209. When the bonus cannot be traced to particular weeks, it is generally allocated equally across the weeks of the period.
The following illustrates this requirement when an hourly employee earns a $2,600 nondiscretionary annual production bonus. The employee worked 50 hours (10 overtime hours) in 20 of the year’s 52 weeks. Allocated equally:
$2,600 ÷ 52 weeks = $50.00 allocated per week
$50.00 ÷ 50 hours = $1.00 increase to the regular rate in each 50-hour week
$1.00 × 0.5 = $0.50 additional half-time premium per overtime hour
$0.50 × 10 overtime hours × 20 weeks = $100.00 additional overtime owed
Multiplied across a workforce and a two- or three-year lookback, with liquidated damages potentially doubling back pay, small per-employee amounts can produce significant exposure. For DOL’s workweek-based calculation examples, see Fact Sheet #56C.
Enforcement Shows Improper Exclusion Costly
DOL and private enforcement demonstrates the high cost employers face for incorrectly excluding bonus or other incentive compensation from remuneration taken into account when calculating overtime pay.
The Apple RSU Litigation. Costa v. Apple Inc., No. 26-4411 (9th Cir.) is the latest reminder that how incentive compensation is structured and documented determines whether it drives up overtime liability.
In Costa v. Apple Inc., No. 3:23-cv-01353-WHO (N.D. Cal.), a former AppleCare adviser filed a collective action in March 2023 in the U.S. District Court for the Northern District of California alleging that Apple failed to include the value of vested RSUs awarded to hourly, non-exempt employees when calculating their overtime rate. The case grew to include an FLSA collective along with California and New York state-law classes.
On June 11, 2026, the district court granted summary judgment based on the facts and circumstances to Apple—reportedly the first federal ruling to hold that RSUs need not be included in the regular rate. If upheld on appeal, the District Court ruling provides employers helpful direction about how to design and administer non-exempt employee equity-based incentive compensation court concluded that Apple’s RSUs were excludable on two independent grounds:
- Gifts and special-occasion payments, 29 U.S.C. § 207(e)(1). The court emphasized that Apple retained full discretion over whether to grant awards, to whom, and in what amount, and that awards were not set by any pre-announced formula tied to hours, output, or efficiency. It rejected the employees’ argument that the service-based vesting requirement converted the awards into compensation for work.
- Stock options, stock appreciation rights, and employee stock purchase programs, 29 U.S.C. § 207(e)(8). Although RSUs are not named in the statute, the court reasoned that Congress would not have intended to treat RSUs differently from stock options given their functional similarity and the shift toward RSUs after the provision was enacted in 2000.
Notably, however, the district court did not rest its ruling on the discretionary-bonus exclusion, reasoning that Apple did not control the ultimate value of the awards once granted because value depended on the share price at vesting. The court also found that Apple acted in good faith—crediting its contemporaneous documentation of the legal basis for its position—which would have barred liquidated damages even had the employees prevailed.
Also, while the federal district court ruled for Apple on RSUs, that decision is now on appeal to the U.S. Court of Appeals for the Ninth Circuit in Costa v. Apple Inc., No. 26-4411 (9th Cir.). In their Ninth Circuit appeal, the employees contend the district court erred in allowing Apple to exclude the stock awards. Until the Ninth Circuit rules, the district court decision is the only federal ruling squarely on point, it binds no other court, and its gift-exclusion analysis is fact-specific to the design and administration of Apple’s program.
While Costa is the first ruling in RSUs, it’s one of a number of RSU and other incentive compensation challenges.
Google RSU and Sign-On Bonus Settlement. In Bowlay-Williams v. Google, LLC, No. 4:21-cv-09942 (N.D. Cal.), hourly employees alleged Google left vested RSUs, commissions, and sign-on bonuses out of overtime calculations. The court granted final approval in August 2023 to an $8.369 million settlement covering an FLSA collective and a California class. Settlement is not an admission of liability, but the case shows the economic pressure these claims generate when equity or bonuses are paid broadly to non-exempt staff.
DOL Opinion Letter FLSA2026-2. On January 5, 2026, the DOL Wage and Hour Division (WHD) concluded that a waste-management employer paying drivers a $12.00 hourly base wage plus “Safety, Job Duties, and Performance” incentive bonuses had to include those bonuses in the regular rate for each workweek in which they were earned. Because the plan set eligibility criteria and amounts in advance, the employer had given up the discretion required for exclusion. Opinion Letter FLSA2026-2.
Other Recent DOL Recoveries. Other recent actions further drive home the advisability of employers auditing their FLSA risks from potential improper omission of bonus, equity or other incentive compensation from hourly employee overtime pay. For example:
- The State Group Industrial (USA) Ltd. Inc. paid $1,730,598 in back wages for 1,666 hourly workers at a Tennessee electric-vehicle and battery manufacturing campus after WHD found the contractor omitted incentive bonuses from the regular rate. DOL News Release (June 23, 2026).
- M.J. Electric LLC paid more than $207,000 in back wages and damages for 157 workers, plus a civil money penalty for a repeat violation, for omitting nondiscretionary bonuses from overtime calculations. DOL News Release (May 22, 2025).
- Boom-a-Rang Diner paid back wages and an equal amount in liquidated damages for non-exempt managers whose monthly performance bonuses were excluded from overtime at 53 Oklahoma locations. DOL News Brief (Mar. 5, 2024).
- Jadex Inc. and subsidiaries paid $259,474 for 939 employees whose sales and safety bonuses, shift incentives, and trainer premiums were left out of the regular rate. DOL News Release (Mar. 27, 2023).
The lesson across these matters is consistent: the violations involved no failure to pay overtime at all—only a failure to pay it on the correct rate. Because the error repeats every overtime workweek for every affected employee, modest per-paycheck shortfalls aggregate quickly.
Violations Trigger Significant Liability
Employees may recover unpaid overtime plus an equal amount as liquidated damages, along with attorneys’ fees and costs, and may sue on behalf of similarly situated employees. 29 U.S.C. § 216(b). The limitations period is two years, extended to three for willful violations. 29 U.S.C. § 255(a).
A court may reduce or eliminate liquidated damages if the employer shows it acted in good faith and had reasonable grounds for believing its practice was lawful. 29 U.S.C. § 260. As Costa illustrates, contemporaneous, counsel-supported documentation of the basis for an exclusion can be decisive on good faith and willfulness.
State law adds another layer. California and New York claims were part of the Apple case, and state wage laws may define wages, the regular rate, or overtime differently from the FLSA. Texas does not generally impose a separate overtime requirement on private employers beyond the FLSA, but multistate employers must evaluate each jurisdiction where non-exempt employees work.
Management/In-House Counsel Should Act To Mitigate Exposures
Since violations are common and trigger significant liability, employers that have or plan to pay remuneration to hourly employees beyond base pay should work with legal counsel to conduct a risk and compliance audit of all additional remuneration within the scope of attorney-client privilege to evaluate and mitigate risks. Leadership generally should:
- Commission any regular-rate audit at the direction of counsel to help preserve attorney-client privilege and work-product protection for findings and recommendations. Employers dealing with these issues also should be careful to avoid discussing or assessing these issues with internal personnel or outside service providers outside the scope of attorney—client privilege as attorney-client privilege and work product evidentiary protections do not apply to audits or discussions of known or potential compliance concerns conducted or shared outside the scope of attorney-client privilege;
- Have legal counsel assist the employer to document the legal basis for any exclusion contemporaneously to support good-faith and non-willfulness defenses;
- Monitor the Costa appeal and other litigation, H.R. 8660, DOL and state labor department enforcement and guidance, and other future developments and be prepared to revise practices promptly as the law develops.
The risk assessment generally should at minimum encompass the following:
Worker Classification Defensibility. Employer misclassification of workers as contractors that the FLSA considers employees and as salaried that do not qualify as exempt employees is common. Since misclassification triggers minimum wage or overtime, as well as FLSA recordkeeping, tax and other costly violations, employers should start my verifying the defensibility of every service provider classified as a non-employee or salaried employee.
Payroll and HR Operations. Employers should ensure their payroll practices and systems capture, properly track, and classify for base rate and overtime purposes all remuneration. The investigation should:
- Inventory every form of pay non-exempt employees receive beyond base wages—bonuses, incentives, commissions, shift and skill differentials, retention and sign-on awards, spot awards, referral payments, and equity—and identify how each is treated in overtime calculations.
- Confirm payroll systems add includable amounts to the regular rate and correctly allocate multi-week bonuses back to the workweeks they cover.
- Train managers that announcing, promising, or routinely paying a bonus can eliminate discretion, regardless of how the program is labeled.
Compensation Committees and Incentive Plan Designers.
The employer should require that compensation committees, incentive plan designers and others involved in planning, offering or providing to confirm the FLSA treatment of the proposed remuneration before announcing or paying it. Additionally, the employer should:
- Review bonus and incentive plan documents, offer letters, handbooks, and employee communications for pre-announced criteria, formulas, or promises that make awards nondiscretionary.
- Where exclusion is intended, design and administer the program to satisfy every element of the applicable exclusion; where it is not, budget for the resulting overtime cost or consider structures such as a bonus expressed as a percentage of total earnings that may satisfy overtime under 29 C.F.R. § 778.210. [VERIFY: § 778.210 conditions]
Equity Plan Sponsors and Benefits Teams
The employer also should require a documented analysis of its existing and planned equity and other benefit programs for FLSA purposes. This analysis should include:
- Identify non-exempt populations receiving RSUs, options, stock appreciation rights, or employee stock purchase plan benefits, and determine how vesting or exercise income is currently treated for overtime purposes.
- Evaluate whether award agreements and plan administration preserve discretion over grants and avoid ties to hours, production, or efficiency, and whether stock option, SAR, and ESPP terms meet Section 7(e)(8) conditions.
- Coordinate with payroll and tax so equity income that must be included is captured in the workweeks to which it relates.
For any upcoming pay, employers should seek the assistance of this legal counsel to design and document the compensation arrangements to qualify as exempt or ensure to include the compensation that will not qualify as exempt in the base pay used to calculate overtime and pay and budget accordingly.
Employers that identify past errors may consider whether to correct them through the WHD Payroll Audit Independent Determination (PAID) program, a direct remediation, or another approach, weighing release, tax, and litigation considerations with counsel. Privately settlements do not resolve Labor Department FLSA exposure unless the Labor Department joins in the settlement.
For Help or More Information
The author of this update, Cynthia Marcotte Stamer has decades of experience advising and representing employers on these and other workforce, compensation and benefit concerns.
Well-known for her knowledge, training and publications on these concerns, Ms. Stamer also is nationally recognized for her extensive publications, training and advocacy on health and other employee benefits matters,
For more information about securing a copy of the recording, attending the upcoming or other briefings, or other health or other employee benefits, workforce, health care or other training, resources, or services, see http://www.solutionslawyer.com orcontact Ms. Stamer via e-mail or via telephone at (214) 452 -8297.
About the Author
Cynthia Marcotte Stamer is an attorney Board Certified in Labor and Employment Law, American College of Employee Benefits Counsel Fellow, and a Martindale-Hubble “AV-Preeminent” (Top 1%) attorney and advisor peer recognized as a “Top Rated Lawyer,” “LEGAL LEADER™” and “Best Lawyer” for her work in ERISA & Employee Benefits Law, Labor and Employment Law, Health Care Law, and Business and Commercial Law.
Nationally recognised for her decades of leading edge human resources, compensation, employee benefits, and other management work, public policy leadership and advocacy, coaching, teachings, and publications, Ms. Stamer is well known for her decades of pragmatic, leading edge work, scholarship and thought leadership on health benefit and other health and managed care, privacy and data security and other employee benefit, insurance, and health industry legal, public policy and operational concerns.
Her experience includes extensive work helping these and other clients design, audit, and defend their compensation, pay, benefits, performance and other policies and practices including designing and updating compliance and risk management programs, responding to government investigations, conducting compliance and risk, transaction, governance, and other due diligence, and assisting with other legal and operational compliance and risk management and legislative and regulatory affairs. She is available to assist your organization in assessing the impact of these developments and dealing with their consequences.
Former lead advisor to the Government of Bolivia on its Social Security Privatization reform, miss Stamer also has extensive legislative and regulatory affairs experience on federal, state and international employee benefits, healthcare, workforce, education, insurance, data privacy and security, antitrust, and other regulations and reforms.
In addition, Ms. Stamer contributes her time and leadership to numerous policy, professional, civil and other organizations, Ms. Stamer currently or previously served as the Scribe leading annual agency meetings on HIPAA and other issues with the Department of Health and Human Services; leadership Council Representative, speaker, author and faculty lead for the American Bar Association (“ABA”) Joint Committee on Employee Benefits; the ABA International Section International Employment Law Committee and International Life Sciences Committee Chair; the ABA Tort Trial and Insurance Practice Section Medicine and Law Committee Chair and Employee Benefits and Worker’s Compensation Committees Vice Chair; the ABA Health Law Section Managed Care & Insurance Interest Group Chair and Risk Management Interest Group Chair; the ABA RPTE Employee Benefits & Other Compensation Group Chair and Welfare Benefit, Fiduciary Responsibility, and Plan Terminations and Transactions Committees Chair; Vice President and Executive Director of the North Texas Health Care Compliance Professionals Association; a Southwest Benefits Association Board Member; a SHRM Consultants National and Region IV Board Chair; WEB National Board Member and Dallas Chapter President; National Kidney Foundation of North Texas Board Member and Compliance Chair; Richardson Development Center (now Warren Center) for Children Early Childhood Intervention Agency Board President; a North Texas United Way Long Range Planning Committee Member; and other leadership involvement in a broad range of other professional and civic organizations.
Author of hundreds of highly regarded works on health and other benefits, human resources, health care, insurance, data privacy and security and other related concerns, examples of these publications include “Transparent PBM Contracting,” “ACOs, Direct Contracting: Legal & Practical Challenges For Employers, Providers & TPAs,” “The Medicare Advantage Contracting Manual,” “Third Party Administrator (TPA) Contracting Principles and Strategies and a multitude of other publications and presentations.
For more information about Ms. Stamer or her health industry and other experience and involvements, see www.cynthiastamer.com or contact Ms. Stamer via telephone at (214) 452-8297 or via e-mail here.
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