Alert

Feb 5, 2025

Illinois Supreme Court Holds Overtime Rate Must Include Non-Discretionary Bonuses Unless They Are Gifts

The Illinois Supreme Court held employers violate overtime law by not including non-discretionary bonus payments when calculating employees’ overtime rate. The case is Mercado v. S&C Electric Co., 2025 IL 129526 (Jan. 24, 2025).

S&C paid its employees various performance bonuses, including: “Incentive payments”, “incentive bonuses” and “performance bonuses.” Those payments were not counted when determining employees’ overtime hourly rate. S&C employees sued. S&C argued the production bonuses did not have to be counted to determine the overtime rate, because the bonuses were not measured by or dependent on hours worked. The trial court and court of appeals agreed.

The Illinois Supreme Court did not. At issue was 56 Ill. Adm. Code 210.410(a). It provides: “The ‘regular rate’ shall be deemed to include all remuneration for employment paid to, or on behalf of, the employee, but shall not include: (a) Sums paid as gifts such as those made at holidays or other amounts that are not measured by or dependent on hours worked.” S&C (and the lower courts) focused on “other amounts that are not measured or dependent on hours worked.” The Illinois Supreme Court focused on the entire clause and held “the phrase ‘other amounts that are not measured by or dependent on hours worked’ must be read as a description of payments that are qualitatively similar to gifts in that they are given freely and not in exchange for an employee’s labor.” As a result, Illinois law appears to be the overtime rate must include all bonuses not in the nature of gifts (e.g., gifts, like the proverbial Thanksgiving turkey.)

To the extent that this is now the law, it conflicts with the federal FLSA. If it only applies to PRODUCTION bonuses – and not bonuses unrelated to hours or production, it is consistent with the FLSA and just a “bad facts, bad law” situation. What do we mean? Under the FLSA, a number of non-discretionary bonuses are excluded from the overtime rate – because they are unrelated to hours worked, production or efficiency. 29 CFR Chapter 778. Examples include service awards for longevity; reporting pay (we only needed you for 1 hour, so we are sending you home, but paying you for the full 8 hours of your shift), signing bonuses that do not require continued employment, and “suggestion box” bonuses. 

S&C could have avoided all this grief by just paying a percentage bonus instead of a fixed-dollar bonus. A percentage bonus is a % of the employee’s total earnings. For example, if an employee makes $55,000 -- $50,000 regular pay and $5,000 overtime pay -- a 1% bonus gives them a $550 bonus. Because it is based on total earnings, including overtime pay, it automatically includes overtime in the hourly rate. See, e.g., 29 CFR 778.210. Many employers are nervous about using percentage bonuses. We think it’s a great idea: It avoids overtime liability. It avoids the administrative nightmare of re-calculating overtime owed for bonuses earned over multiple weeks or months. And it’s just math. For example, if a company was planning on $500 bonuses and (like our example) the typical employee earns $55,000 ($5000 in overtime, $50,000 regular pay), it can give .0909% bonuses instead of 1%. (.0909 x 55000 = $499.95, close enough to $500.)