By Sharon Gold
Last month, the Department of Labor (“DOL”) published a Final Rule that revised certain regulations concerning the Fair Labor Standards Act (“FLSA”) regular rate requirements. The Final Rule is effective January 15, 2020.
Under the FLSA, non-exempt employees must be paid one and a half times their regular rate for overtime. Which bonuses and perks to include in the regular rate has been confusing to employers for decades. Despite the changing workforce of modern benefits and perks of employment, the regulations concerning which perks to include in the regular rate has not been revised in more than fifty years.
The Final Rule clarifies that several benefits and perks should be excluded from the regular rate. For example, the Final Rule allows employers to exclude the following non-exhaustive list of benefits from the regular rate:
- the cost of providing certain parking benefits, wellness programs, onsite specialist treatment, gym access and fitness classes, employee discounts on retail goods and services, certain tuition benefits (whether paid to an employee, an education provider, or a student-loan program), and adoption assistance;
- payments for unused paid leave, including paid sick leave or paid time off;
- payments of certain penalties required under state and local scheduling laws;
- reimbursed expenses including cellphone plans, credentialing exam fees, organization membership dues, and travel, even if not incurred “solely” for the employer’s benefit; and clarifies that reimbursements that do not exceed the maximum travel reimbursement under the Federal Travel Regulation System or the optional IRS substantiation amounts for travel expenses are per se “reasonable payments”;
- certain sign-on bonuses and certain longevity bonuses;
- the cost of office coffee and snacks to employees as gifts;
- discretionary bonuses, by clarifying that the label given a bonus does not determine whether it is discretionary; and
- contributions to benefit plans for accident, unemployment, legal services, or other events that could cause future financial hardship or expense.
See Fact Sheet: Final Rule to Update the Regulations Governing the Regular Rate under the FLSA (December 2019).
The Final Rule also provides guidance on which bonuses are considered discretionary and, thus, may be excluded from the regular rate. The Rule provides “Examples of bonuses that may be discretionary include bonuses to employees who made unique or extraordinary efforts which are not awarded according to pre-established criteria, severance bonuses, referral bonuses for employees not primarily engaged in recruiting activities, bonuses for overcoming challenging or stressful situations, employee-of-the-month bonuses, and other similar compensation. Such bonuses are usually not promised in advance, and the fact and amount of payment are in the sole discretion of the employer until at or near the end of the period to which the bonus corresponds.” 29 CFR 778.211.
In addition, the Final Rule eliminates the restriction that call back pay and other payments similar to call back pay have to be infrequent and sporadic to be excludable from the regular rate, but they still must not be prearranged.
Finally, the Final Rule updates the regulations pertaining to the “basic rate,” which is an alternative to the regular rate. If an employer authorizes the basic rate, then the employer may exclude from overtime any additional payment that would not increase total overtime compensation by more than 40 percent of the higher of the applicable local, state, or federal minimum wage a week on average for the overtime workweeks in which the employer makes the payment. Other basic rate requirements can be found at 29 CFR 548.3, 19 CFR 548.305, and 29 CFR 548.400.
The Final Rule is available here. The DOL also published a fact sheet and highlights. Since the determination of what to include in the regular rate affects payment of overtime, the determination of the regular rate is integral. Employers are wise to seek counsel before determining whether a benefit should be included or not.