The U.S. Department of Labor (DOL) recently announced a final rule that updates regulations governing the “regular rate” of pay under the Fair Labor Standards Act (FLSA). Taking effect on January 15, 2020, the rule is not only the first major update in decades, but also provides clarity regarding what should be included or excluded from the regular rate calculation. According to the DOL, this rule will allow employers to provide certain benefits without missing unaccounted overtime or risk of litigation.
The regular rate is the basis for calculating overtime under the FLSA, which requires nonexempt employees to be paid one and a half times the “regular rate” when they work in excess of 40 hours per week. The regular rate is defined as “all remuneration” paid to the employee, excluding items such as gifts, vacation pay, discretionary bonuses, reasonable travel expenses and others. Litigation usually arises from the types of payments and benefits that should’ve been included and what should’ve been excluded in “all remuneration.”
New Rule Clarification
The DOL’s final rule updates the regulations and clarifies what types of benefits, perks and other payments should be included/excluded in the regular rate used to calculate overtime pay. Specifically, the rule clarifies that the following payments should be excluded:
- Certain parking benefits, wellness programs, onsite specialist treatment, gym access and fitness classes, employee discounts on retail goods and services, certain tuition benefits, and adoption assistance;
- Unused paid leave, including paid sick leave or paid time off;
- Certain penalties required under state and local scheduling laws;
- Work-related reimbursements for cellphone plans, credentialing exam fees, organization membership dues, and certain travel expenses. The rule also 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 automatically fall under the travel expense exclusion;
- Certain sign-on and longevity bonuses;
- Employer provided coffee and snacks to employees as gifts; and
- Contributions to benefit plans for accident, unemployment, legal services, or other events that could cause financial hardship or expense.
The final rule also provides additional clarification on discretionary bonuses, which are excluded from the regular rate. The new rule states that it’s not the label or name given to a bonus that determines whether it is discretionary; rather, it’s the terms of the statute and the facts specific to the bonus at issue. A bonus is considered discretionary and excludable if it is paid at the sole discretion of the employer and not paid pursuant to any contract, agreement or promise causing the employee to expect the payment. The new rule also provides examples of bonuses that are typically discretionary, including severance bonuses, referral bonuses for employees not primarily engaged in recruiting, bonuses for overcoming challenging/stressful situations, and employee of the month bonuses — all of which are typically paid at the discretion of the employer and not promised in advance.
Employers offering certain benefits and perks to their employees will find the new regulations helpful. These regulations may also influence other employers to decide if they want to provide certain popular perks to employees. Employers should consult legal counsel and consider auditing their regular rate practices to ensure they’re in compliance.
Additional clarifications on other types of compensation and other items included in the new final rule can be found on the Federal Register website.