New rule

Key takeaways

The US Department of Labour (DOL) has announced a final rule (the new rule) that updates several regulations regarding what forms of payment employers can exclude in the time-and-a-half calculation for overtime pay. The new rule clarifies that employers can exclude a range of employee perks and state-mandated payments in calculating overtime under federal law.


The Fair Labour Standards Act (FLSA) requires employers to pay non-exempt employees at least one-and-a-half times their regular rate for hours worked exceeding 40 per work week. The FLSA defines the 'regular rate' as "all remuneration for employment paid to, or on behalf of, the employee". Decades ago, the DOL issued several regulations addressing how employers must calculate the regular rate under Part 778 of the Code of Federal Regulations Title 29. However, those regulations have left employers uncertain about how to treat payments that are common in modern employee compensation packages and required under state scheduling and paid leave laws.

New rule

In a much-welcomed development among employers, the new rule clarifies that employers may exclude the following from an employee's regular rate payments:

  • unused paid leave, such as paid sick leave or paid time off;
  • certain penalties required under local and state scheduling laws, such as reporting time or show-up pay (eg, the kind required in California and New York), call-back pay and pay for failing to give an employee sufficient notice to report for work, even if such payments are not infrequent or sporadic (but such payments cannot be prearranged);
  • parking benefits, wellness programmes, gym access and fitness classes, discounts on retail goods and services, tuition benefits and adoption assistance;
  • office coffee and snacks; and
  • reimbursements for expenses including mobile phone plans, membership dues and credentialing exams.

In addition, the new rule provides additional examples of discretionary bonuses that may be excluded from the regular rate. Although the FLSA regulations have long permitted employers to exclude discretionary bonuses, the DOL and plaintiffs' lawyers often challenge bonus payments as not qualifying as truly discretionary. While the new rule reiterates that "the label or name assigned to bonuses" is not a controlling factor, it gives examples of bonuses that may be discretionary, such as:

  • bonuses for employees who made unique or extraordinary efforts that are not awarded according to pre-established criteria,
  • referral bonuses for employees not primarily engaged in recruiting activities; and
  • employee-of-the-month bonuses.

The new rule was published in the Federal Register on 16 December 2019 and will take effect on 15 January 2020.(1)

Key takeaways

The new rule provides employers with more certainty in calculating overtime payments and better defences in the face of challenges to their overtime payment policies. Accordingly, employers should review their pay practices with the new rule in mind. However, employers should remember that the courts will not necessarily use the new federal rule to interpret state overtime laws; indeed, California has departed from federal law on overtime issues in the past.

For further information on this topic please contact Brian Baggott at Dentons US LLP's Kansas City office by telephone (+1 816 460 2400) or email ([email protected]). Alternatively, contact Erin Bass at Dentons US LLP's Phoenix office by telephone (+1 602 508 3900) or email ([email protected]). The Dentons US LLP website can be accessed at


(1) The full text of the new rule is available here, and the DOL's press release on the new rule is here.