Overtime Pay is Not a Bonus

Key takeaways

• Overtime pay isn’t a proxy for bonuses
• Bonuses are not a necessity for all employees
• There are multiple compensation approaches that can support improvements in employee motivation,  retention and recruitment
• Additional payroll detail may be necessary for employees to benefit from new tax savings opportunities  
• Make sure company policies comply with applicable laws and regulations                                                                                          

From time to time we hear from construction leaders that field employees receive low or no bonuses because they are overtime-eligible. Our response is consistent: overtime pay and bonuses for non-exempt employees are not synonymous.

Overtime pay is a legal obligation under the Fair Labor Standards Act (FLSA) for hours worked. Bonus pay represents an employer’s monetary recognition or appreciation for workers’ contributions Therefore, paying overtime compensation to employees should not be justification for a lack of bonus opportunity.

But new provisions in One, Big, Beautiful Bill Act (OBBBA) are clouding this perspective, suggesting overtime pay could be similar to a bonus. 

What’s New?

Under the OBBBA, new Code §225 creates a temporary “no-tax on overtime” deduction for tax years 2025 through 2028. Individuals may deduct the “premium” portion of overtime pay — the “half” in the time-and-a-half required by FLSA — provided that overtime was required by the FLSA and reported on a Form W-2, Form 1099 or other relevant payee statement. The deduction is capped at $12,500 per year (or $25,000 if married filing jointly), with a phase-out beginning at $150,000 modified adjusted gross income ($300,000 if married filing jointly). (Employers would do well to ensure employees have the right payroll detail to take advantage of the new provision.)

This opens an argument for characterizing the tax savings as a bonus of sorts. Given the maximum deduction amount, this “bonus” would remain relatively modest. For example, let’s assume a non-exempt foreman earns an hourly base rate of $50 and works 300 hours of overtime in 2026. As a result, total pay for overtime hours (at time plus half) will be 300 multiplied by $75, or $22,500. The “half,” or overtime premium of $7,500, can be deducted by the employee. So if the employee’s tax rate is 24%, the savings amounts to $1,800.

So Is This Tax Savings a Bonus?

In short, no. While the tax savings under the OBBBA is a noteworthy new benefit for eligible workers, it is a government directive, not an employee reward. An individual would be eligible to receive similar savings regardless of where they are employed unless overtime opportunity differs dramatically among employers.

Overtime pay and this new tax savings — while potentially small in value — are enhancements for eligible employees because they are an exclusive right that not all employees have. But this doesn’t not make such compensation a bonus, nor should it be considered a substitute for one.

Then What is a Bonus?

The purpose of a bonus, as commonly understood, is to recognize and reward employees’ contributions. Used appropriately within a fair and competitive total compensation package, bonuses encourage performance and engagement. This general definition reinforces that a government-enacted tax savings can’t be characterized as a bonus.

How Can Overtime-Eligible Workers Be Compensated?

There are multiple ways to recognize and reward overtime-eligible employees:

1. Goals-based (non-discretionary) bonuses
Fundamentally, goals-based plans define what can be earned (the bonus opportunity) and how to earn it (performance goal expectations). Formal incentive programs are prevalent among contractors, though mostly for salaried (exempt) employees. Plans that aim to align all employees, such as profit-sharing programs, tend to be highly inclusive. Note: There are unique considerations for overtime-eligible employees, whose overtime pay must be considered in the award determination process.

2. Discretionary bonuses
Discretionary bonuses may be awarded to non-exempt employees without the above-referenced adjustment for overtime pay provided they are truly subjective (i.e., not based on any formula rooted in hours worked, wages, project performance, etc.) and largely unexpected. This could include:

• Spot awards
• Task completion recognition
• Holiday bonuses
• Non-monetary rewards, such as employee lunches, ‘shout outs,’ etc.

3. Pay other than bonuses
Many non-exempt construction employees do not receive bonuses. Instead, value for their work is represented through competitive base pay and promotional, skills-based or time-based opportunities to earn more in base wages during their tenure. Job-related benefits, including tool allowances, training and certification programs, and flexible or alternative schedules, can also be particularly impactful in the field.

What Does This Mean for Employers?

Construction leaders should determine if and how they want to structure bonus programs for employees, separate from their required overtime policies. Understanding the pros and cons of different approaches can help you create a compensation program that retains current team members and helps recruit new ones.