On January 24, 2025, the Illinois Supreme Court issued a significant decision in Mercado v. S&C Electric Co., 2025 IL 129526, clarifying the treatment of performance bonuses under the Illinois Minimum Wage Law (“IMWL”). The Court held that performance bonuses which are not measured by or dependent on hours worked must still be included in the “regular rate” of pay when calculating overtime compensation.
Background
In December 2020, Carmen Mercado and Jorge Lopez filed a class action lawsuit against their former employer, S&C Electric Company, seeking unpaid overtime wages under the IMWL. Although S&C paid performance bonuses to its employees, the plaintiffs alleged that the company unlawfully excluded those bonuses from the calculation of their “regular rate” of pay used to determine overtime wages, thereby underpaying them.
The circuit court dismissed the claim, citing insufficient evidence regarding the nature of the bonuses and concluding that subsequent adjusted payments made by S&C after the plaintiffs’ employment ended satisfied any underpayment. The Illinois Appellate Court affirmed that ruling.
The Supreme Court’s Decision
The Illinois Supreme Court reversed both lower courts. Interpreting the definition of “regular rate” under the IMWL, the Court emphasized that the statute excludes “sums paid as gifts such as those made at holidays or other amounts that are not measured by or dependent on hours worked.”
The Court reasoned that the phrase “other amounts” must be read in context with “gifts,” meaning it applies only to payments that are qualitatively similar to gifts—i.e., voluntary, discretionary payments not tied to labor or performance. In contrast, performance bonuses—though not based on hours worked—are still compensation for work performed and thus do not fall under the statutory exclusion.
Accordingly, the Court held that such bonuses must be included in the regular rate of pay for purposes of calculating overtime under the IMWL. The Court also rejected S&C’s argument that its retroactive payments fully compensated the plaintiffs, finding “no question” that they fell short of what was owed.
Example
To illustrate, consider an employee who earns $20.00 per hour and works 50 hours in one week. Without any bonuses, the regular overtime calculation would be:
Regular pay: 40 hours × $20.00 = $800
Overtime pay: 10 hours × $30.00 (1.5× regular rate) = $300
Total: $1,100
Now assume that same employee also earned a $200 performance bonus for meeting production goals that week. Under the Illinois Supreme Court’s interpretation in Mercado, that bonus must be included in the “regular rate.” The regular rate is recalculated as:
($800 regular pay + $200 bonus) ÷ 40 hours = $25.00/hour
Overtime pay: 10 hours × $37.50 (1.5× $25.00) = $375
Total wages for the week = $800 + $200 bonus + $375 overtime = $1,375
If the employer had excluded the bonus from the calculation, they would have underpaid the employee by $75 in overtime. Over time and across a workforce, such miscalculations can lead to significant liability.
Key Takeaways for Employers
This decision serves as a critical reminder to Illinois employers:
- Performance bonuses must be factored into the regular rate of pay for calculating overtime, even if those bonuses are not tied to hours worked.
- Statutory exclusions under the IMWL are narrow, and courts will interpret them in line with their plain meaning and context.
- Retroactive payments post-employment may not insulate an employer from liability if they do not fully satisfy statutory wage obligations.
Employers should review their bonus structures and payroll practices to ensure compliance with this clarified interpretation of the IMWL, especially in calculating overtime compensation. Legal counsel or a wage and hour compliance specialist can assist in auditing existing policies to avoid potential exposure.