Written by Renato Romero, Associate
A business just hit a major milestone. To reward an employee, the company decides to give her a one-time $500 “thank you” bonus. Payroll processes it as a separate payment and moves on. Months later, the employee files a class action lawsuit. Not because of the bonus itself, but because of how it was classified. That single bonus was not properly included in the regular rate of pay calculation—potentially turning a simple gesture of goodwill into a company-wide wage liability.
So what went wrong? The answer starts with a concept most employers don’t know until they’re staring down a lawsuit: the “regular rate of pay.” In simple terms, this is the real hourly rate used to calculate overtime, sick leave, and extra pay when required breaks are not provided. And here is the catch: that rate is often higher than the base hourly wage because it includes more than just hourly pay. It can also include commissions, bonuses, and other earnings.
So the key question becomes: should the $500 “thank you” bonus have been included in the regular rate of pay? As a general rule, most bonuses tied to work, performance, attendance or production—or that are nondiscretionary in nature—must be factored into the regular rate of pay. In contrast, true gifts and purely discretionary bonuses may be excluded. A useful shorthand: if the bonus is expected or tied to work, include it. If it is a genuine, no-strings-attached surprise, it may qualify for exclusion.
The employer here might argue that this was simply a gift—a spontaneous thank-you with no strings attached. But simply labeling a payment a “gift” doesn’t make it one in the eyes of the law. What matters is the substance: If the bonus was tied to reaching a business milestone or recognizing employee performance, courts and regulators are likely to treat it as compensation that must be included in the regular rate of pay.
And here is where the stakes multiply quickly. This isn’t just about one employee or one paycheck. If the business applies the same bonus treatment company-wide—which most do—a single miscalculation becomes a systemic one. A recent California appellate decision illustrates the point. In Martinez v. Sierra Lifestar, the California Court of Appeal (Fifth District, April 2026) reversed the trial court’s denial of class certification in a regular rate of pay dispute. The employer argued that plaintiff’s bonus situation was unique because it paid 10 different types of bonuses. The appellate court disagreed: because the employer applied the same exclusion rationale—characterizing the bonus as a gift or discretionary payment—to all employees company-wide, the typicality requirement for class certification was satisfied. One employee, one bonus, one payroll practice—and the door to a class action was open.
The consequences can be significant. A misclassified bonus that is not included in the regular rate of pay can trigger a payroll audit going back several years. A court could order payment of unpaid overtime, meal and rest break premiums, penalties, attorneys’ fees, and damages for inaccurate wage statements.
The good news is that this risk is preventable. Businesses can take simple steps to protect themselves: review all bonus types, make sure they are properly classified, ensure payroll includes them when calculating overtime, and conduct periodic legal or payroll audits. Most importantly, avoid “one-size-fits-all” assumptions because how a bonus is treated can make all the difference.
Bonuses are not just extra payments—they are compensation components that must be properly characterized because they directly impact on how wages are calculated. What matters is not the amount, the label, or the good intentions behind the payment. What matters is its nature and how it is factored into your payroll. A proactive review of your bonus structures—paired with proper payroll calculations and periodic legal guidance—can help your business avoid costly mistakes before they become class actions. If you have questions about how your bonus or incentive pay practices may affect overtime and wage calculations, contact Koegle Law Group for a confidential consultation.
About Koegle Law Group, APC
Koegle Law Group, APC is a boutique employment law and business litigation firm serving employers and business owners in California and Texas. Our attorneys advise clients on wage and hour compliance, PAGA defense, class action defense, employment counseling, and general business matters. For a confidential consultation, contact us at:
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Disclaimer: This article is intended for general informational purposes only and does not constitute legal advice. The information contained herein may not reflect the most current legal developments and is not guaranteed to be correct, complete, or up to date. Nothing in this article should be construed as creating an attorney-client relationship. Employers and HR professionals should consult with competent employment counsel regarding their specific facts and circumstances before taking any action.