How Does a Clawback Clause Affect Overtime Calculations? What Payroll Should Know

Not every sign-on bonus belongs in the overtime calculation – and a recent federal case out of Virginia shows why.

A fired employee filed a lawsuit against his former employer, claiming he was illegally terminated after complaining about a co-worker’s alleged use of the N-word. He later added claims under the Fair Labor Standards Act (FLSA) and state law, alleging he was “undercompensated during his employment” due to his sign-on bonus.

Details of the Sign-On Bonus

When the ex-employee was hired, he received a nondiscretionary sign-on bonus, payable within the first 30 days. His offer letter required repayment of some or all of the bonus if he left voluntarily or was terminated for violating company policies within 12 months.

Based on the provision in the offer letter, the former employee said the bonus should’ve been included when calculating his overtime rate over the 12-month period. He worked overtime during three pay periods, but his bonus wasn’t included. According to his calculations, the bonus should’ve increased his regular rate by about $2.50 per hour.

He Blames Payroll for Error in Overtime Calculations

The former employee also claimed the company acted willfully by failing to pay him the proper overtime wages. He said the in-house payroll department processed his pay and had “complete control” over his overtime calculations, making the company responsible for FLSA compliance.

He argued employers must include nondiscretionary bonuses in an employee’s regular rate when calculating overtime. According to the complaint, the company knew or should’ve known his sign-on bonus covered a 12-month period and should’ve prorated it into his regular rate. By excluding the bonus, the company knowingly violated the FLSA or acted with reckless disregard for the law, he alleged.

Employer’s Take: Why Bonus Wasn’t Included in OT

The employer argued that the bonus didn’t need to be included in overtime calculations because the former employee received it as a lump sum during his first week of employment and didn’t work overtime during that week or the first 30 days, when the bonus was payable under the offer letter.

From the employer’s perspective, payroll made the right call.

Court Explains How Bonus Should’ve Been Applied

The court cited a federal regulation that allows employers to calculate overtime without including a bonus until its exact amount can be determined. Once the amount is known, the bonus must be allocated back to the weeks in which it was earned and included when recalculating overtime.

That rule applied here, the court said, because the clawback provision meant the employer could not know the amount of the bonus the employee was entitled to keep until the end of the 12 months or upon termination.

Moreover, the court pointed out that the former employee was fired a little over two months after his start date, so all of the bonus was repayable. Ultimately, he wasn’t entitled to any of the sign-on bonus, so the employer didn’t violate the FLSA by not incorporating the bonus into his overtime rate. Case dismissed. 

Payroll takeaways: 

• Review sign-on bonus terms to determine when the bonus must be included in the regular rate for overtime calculations, and
• A clawback provision may allow payroll to exclude a bonus until the employee’s entitlement to the bonus is known.

More info: Fowler v. Caesars Virginia, LLC, No. 4:24-cv-00029 (W.D. Va. 6/5/26).