Bonuses to Non-Exempt Employees Can Create Significant Wage-and-Hour Exposure 

by Mimi Ahn and Joyce Choi

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The recent California Court of Appeal decision in Martinez v. Sierra Lifestar, Inc., 119 Cal. App. 5th 1303 (2026) serves as another reminder that bonuses paid to hourly employees may need to be included in the regular rate of pay when calculating overtime. 

In Martinez, the plaintiff alleged that Sierra Lifestar, Inc., among other things, failed to include certain employee bonuses when calculating an employee’s regular rate of pay for purposes of overtime. The employer argued that some of the bonuses were discretionary and therefore did not need to be included. Although the Court of Appeal did not decide whether the bonuses were properly excluded, it reversed the trial court’s denial of class certification and remanded for further proceedings. 

This appellate court decision serves as an important reminder that employers should carefully evaluate any bonuses paid to non-exempt employees to see if it may affect their calculation of the regular rate of pay. Under California law, the regular rate of pay is not always limited to an employee’s hourly wage. Certain forms of additional compensation, including many types of bonuses, must be included when determining the rate used to calculate overtime. 

A key threshold issue is whether a bonus is discretionary or non-discretionary. Discretionary bonuses are generally awarded at the employer’s sole discretion and are not promised in advance. Non-discretionary bonuses, on the other hand, are often tied to performance, attendance, productivity, safety goals, retention, or other measurable criteria. Because employees expect to earn these bonuses if certain conditions are met, they generally must be included in the regular rate of pay. 

When a non-discretionary bonus is excluded from the regular rate calculation, the impact can extend beyond unpaid overtime wages as it would also affect double-time pay, meal and rest break premiums, wage statements, and waiting-time penalties. As a result, what may appear to be a minor payroll issue can lead to significant liability, particularly when the same compensation practices apply to a large group of employees. 

While the Martinez decision was regarding class certification and not a ruling on whether the bonuses were discretionary or non-discretionary, it serves as a useful reminder that bonus programs should be reviewed regularly to ensure compliance with California wage-and-hour laws. While bonuses remain an effective way to reward employees and encourage performance, incentive compensation can carry additional payroll obligations.  

Employers should consider working with payroll providers and legal counsel to determine whether bonuses paid to their hourly employees must be incorporated into regular rate calculations and whether any retroactive adjustments are required. Careful review of bonus programs and overtime calculations can help reduce the risk of costly wage-and-hour disputes and ensure employees receive all compensation required by law. 

This content is provided for informational purposes only and does not constitute legal advice. The views and opinions expressed are those of the author and do not necessarily reflect the views of the author’s law firm or its clients. No attorney-client relationship is created by this content.