Q. We offer free lunches to our food service employees. Can we count the cost of these lunches as part of our employees' compensation?

A. The short answer is yes, but as we all know, there's no such thing as a free lunch, particularly in the world of wage and hour law. To explore the right way to do this, it's helpful to take a look at some common mistakes that employers make.

Suppose Jerry works at Bob's Steak 'N Beans as a line cook. Bob's is located in Illinois, so the minimum wage for non-tipped employees is \$8.25 per hour. Suppose Jerry works 45 hours over 5 work days in a week. For that week, he would be entitled to straight-time wages of \$371.25. However, rather than paying that full amount in cash, Bob provides Jerry with a free Steak 'N Beans Bonanza platter each day for lunch. The menu cost of the platter is \$15, so Bob deducts \$15 per day from Jerry's pay, leaving him with \$296.25 in straight-time pay. On Thursday, Jerry brought a salad from home, but Bob still charged him for the platter since it was available to Jerry even if he didn't eat it. (Bob ended up serving it to a customer.) Bob didn't just fall of the turnip truck, so he knows that he also has to pay Jerry overtime for 5 hours. So Bob takes Jerry's total straight-time wages (\$296.25), divides by 45, and divides by two to get an overtime premium rate of \$3.29 per hour. Multiplied by five hours, he gets \$16.46. Adding that amount to Jerry's straight-time pay, Bob comes up with a total of \$312.71.

Can anyone spot the problems here?

Calculating the "Reasonable Cost" of Meals

The FLSA does allow employers to count the reasonable cost of meals furnished to an employee as part of the employee's wages for purposes of complying with the FLSA's minimum wage requirements. (The same is true under Illinois law.) However, &quot;reasonable cost&quot; means just that - the employer's cost, not the retail price of the meal. Here's what Section 30c06 of the DOL's Field Operations Handbook (.pdf) says on the subject:

1. The "reasonable cost" of meals furnished by a food service establishment to its employees includes only the actual cost to the employer of the food, its preparation, and related supplies. Salary or wage costs, as distinguished from material or supply costs, may be claimed only to the extent that such salary or wage costs are shown to be directly attributable to the cost of providing meals to employees. If food preparation/serving employees of a food service establishment would be paid the same rate of pay even if meals were not provided to the employees of the establishment, their wage costs cannot be included in determining reasonable cost. Conversely, if it were necessary to hire extra personnel or pay higher wages to existing employee sin order for them to assist in furnishing meals to employees, such extra expense would be a legitimate cost which could be included in determining the "reasonable cost" of meals.
2. Costs which a food service employer incurs regardless of whether the employees were furnished meals may not be included in determining "reasonable cost." In a food service establishment, items such as employee insurance, payroll taxes, menus, decorations, other operating supplies, laundry, telephone, maintenance services, advertising and promotion, building and equipment rental, licenses and taxes, insurance and deprecation, franchise cost, and general administrative costs are a part of the overall cost of the operation and of the employer's business establishment which may not be charged to the reasonable cost of employees' meals.

Here, Bob can certainly take credit for the cost of the food that he serves to Jerry on the days that Jerry elects to eat his Steak 'N Bean Bonanza. He cannot, however, charge Jerry the full menu price of \$15, as that amount necessarily includes a mark-up for overhead and profit that cannot be charged to employees. As explained above, Bob might be able to tack on some additional amount for labor if he can demonstrate that he incurred increased labor costs as a result of providing employee meals. However, that's going to be a tough case to make in case like this where Jerry is simply eating off the menu and the kitchen staff likely would be there on the clock whether or not Jerry chose to partake.

Meals "Furnished" To Employees

Bob also has an issue in that he charged Jerry for a meal even on Thursday, when Jerry decided to forgo his usual dose of beef and beans in favor of a healthful salad. To take credit for the cost of a meal "furnished to an employee," not only must the employee receive the benefits of the facility for which he is charged, but it is essential that his acceptance of the facility be voluntary and uncoerced. Here, Jerry didn't eat the meal provided for him on Thursday, and Bob simply re-sold the meal to a customer. Essentially, Bob is double-dipping from the bean pot - something the law does not allow.

Meals and Overtime

What about that overtime calculation? Bob had the right idea, sort of, when he used Jerry's total straight-time compensation for the week, divided by the number of hours worked to determine a "regular rate," divided by two to determine the overtime premium rate, and multiplied that rate by the number of overtime hours to determine the amount of overtime pay due. His mistake was in failing to consider the cost of the meals furnished to Jerry as part of Jerry's compensation. Remember, Jerry is entitled to be paid at least the minimum wage for all hours worked, plus an additional 50% of the minimum wage for any overtime hours. That Bob elects to pay part of Jerry's wages in meat and beans rather than cash doesn't excuse him from factoring the value of the meal into the overtime calculation.

This would be an issue in the overtime calculation even if Jerry's regular wages less the cost of meals exceeded the minimum wage. When an employer takes deductions from employee pay for the cost of meals, "the employee's 'regular rate' is the same as it would have been if the occasion for the deduction had not arisen." 29 CFR § 778.304(b). In other words, Bob can take credit for the cost of the meals furnished to Jerry (subject to the restrictions above), but doing so doesn't reduce Jerry's "regular rate" of pay for purposes of calculating overtime.

But what if Bob doesn't deduct the cost of meals from Jerry's pay? Does he still have to include that cost as part of Jerry's "regular rate" when calculating overtime? In some places the FLSA regulations seem to say so, as compensation must include not only cash wages but food and lodging furnished to an employee.  See 29 CFR § 778.116. However, the regulations expressly permit an employer to reach an "agreement or understanding" with an employee to exclude the cost of a single meal per day from the employee's regular rate of pay. 29 CFR §548.3(d),  29 CFR § 548.304. So as long as Bob and Jerry agree in advance that the cost of Jerry's daily pile of beef and beans will not be included in his overtime pay, Bob can skip the paperwork and allow Jerry to chow down. However, if Bob is smart, he will make sure that this understanding is documented to head off any later disputes with Jerry about how his overtime is calculated. In the absence of such an agreement, or if Bob provides Jerry more than one free meal per day, Bob may have to pay Jerry additional overtime based upon the cost of the "free" meals.

Insights for Employers

• There is nothing illegal about providing meals to employees, but employers who do so need to pay attention to how those meals may factor into employee pay.
• Employers who wish to take credit for free meals furnished to employees need to calculate and keep accurate records of their costs.
• Conversely, employers who do not wish to factor regularly-provided free meals into overtime pay should reach an express understanding with their employees to that effect.