The Hidden Costs of “Free”: FLSA Pitfalls with Bonuses, Perks, and Reimbursements

Employers often rely on bonuses, stipends, and perks to reward employees and create a positive workplace culture. From holiday gift cards to monthly wellness stipends, these benefits seem straightforward. But under the Fair Labor Standards Act (FLSA), even well-intentioned rewards can complicate overtime calculations and lead to costly compliance issues if mishandled.

Why It Matters: FLSA and Overtime Pay

The FLSA requires that nonexempt employees receive overtime pay at one-and-a-half times their “regular rate” for hours worked beyond 40 in a workweek. While many employers consider the “regular rate” to be the hourly wage or salary alone, the law defines it more broadly, including most forms of compensation. That means bonuses, stipends, and certain reimbursements may need to be factored into the overtime calculation.

Common Benefits That Create Risk

Bonuses

Nondiscretionary bonuses, defined as bonuses promised or expected by employees, such as performance incentives, attendance awards, or productivity bonuses, must be included in the regular rate of pay. Discretionary bonuses, such as unexpected holiday gifts that are not tied to hours worked or performance, are generally excluded.

Gift Cards and Cash Equivalents

Even small-value gift cards given as rewards for meeting goals or working overtime are often treated like wages under the FLSA and must be included in overtime calculations. A $50 card handed out at the holidays with no strings attached is likely okay; however, a $50 card for meeting a goal or target may not be.

Stipends and Allowances

Payments such as monthly cell phone stipends, wellness allowances, or housing stipends may also affect the regular rate. If these payments are more than reimbursements for actual expenses, they can be considered compensation that increases overtime pay obligations.

Stipends and Allowances

True reimbursements for business expenses, such as mileage or travel, typically do not count toward the regular rate. But flat allowances not tied to actual expenses—for example, a flat $100 per month “travel stipend”—could be reclassified as wages.

The Compliance Pitfall: Misclassification of Payments

The risk lies in misclassifying what is and isn’t part of the regular rate. When employers fail to include nondiscretionary payments in the overtime calculation, they inadvertently underpay employees. This exposes the company to:

• Back pay liability for unpaid time.

• Liquidated damages equal to the amount of unpaid wages.

• Attorneys’ fees and penalties under federal law, and potentially under state wage-and-hour statutes.

Building Compliance Into Your Culture

Audit Compensation Practices

Review all forms of pay (bonuses, stipends, and perks) to determine whether they should be included in the regular rate.

Define Bonuses Clearly

Spell out whether a bonus is discretionary or nondiscretionary, and ensure the practice matches the written policy.

Tie Reimbursements to Actual Expenses

Avoid flat allowances unless they closely approximate actual costs incurred by employees.

Train Managers and HR Staff

Supervisors often design incentive programs without realizing the FLSA implications. A compliance review before rollout can prevent costly mistakes.

Document Thoroughly

Keep clear records of how and why compensation is structured to show good faith compliance in the event of an audit.

A Lesson from the Warehouse Floor

Imagine a warehouse worker earning $20 per hour, who regularly works 50 hours per week. The employer provides a $100 monthly attendance bonus. Under the FLSA, that bonus must be factored into the regular rate before calculating overtime. If it isn’t, the employer could be liable for underpaying every hour of overtime worked that month, multiplied across all eligible employees. Misclassification can be an expensive risk. 

The Bottom Line

Perks and bonuses are powerful tools for employee engagement, but they come with legal strings attached. The FLSA’s broad definition of “regular rate” means employers must carefully account for nondiscretionary pay when calculating overtime. Overlooking these details can transform small rewards into significant liabilities.

If your organization is unsure whether its perks, bonuses, or reimbursement practices comply with the FLSA, our experienced employment firm can help audit your policies, reduce legal exposure, and safeguard your business.