The Department of Labor recently issued a final rule about how to calculate an employee’s regular rate of pay for overtime purposes under the Fair Labor Standards Act. As everyone knows, under the FLSA you have to pay nonexempt employees overtime pay for any hours worked over 40 in a workweek. We also know that the overtime rate is one-and-a-half times an employee’s “regular rate of pay.” So, what constitutes an employee’s “regular rate of pay”?

The FLSA defines the regular rate as “all remuneration for employment paid to or on behalf of an employee” and sets out eight exclusions in Section 7(e). Simple, right? But what if you pay for an employee’s parking or gym membership? What about a sign-on bonus or a Christmas bonus? All of those things, arguably, are part of an employee’s remuneration. Do you have to count them when you calculate the regular rate of pay for overtime purposes? Frankly, the DOL had not updated the exclusions in 50 years so the final rule is helpful.

Examples of What You Can Give Employees but Exclude from the Overtime Rate

The final rule, announced December 12, 2019, clarifies what “perks, benefits, or other miscellaneous payments” must or must not get counted. If you are paying your nonexempt employees benefits and perks, you should check the rule, but here are some examples from the new rule:

  • Pay for forgoing holidays or leave. If the employee works the holiday (and gets paid for each hour worked) but you still pay him or her the “holiday pay,” you count the hourly wages but not the “holiday pay.” The same rule applies if you pay out unused sick or vacation time.
  • Leave pay for jury duty, bereavement, voting, attending school activities, etc. If you provide paid leave for these kinds of activities during which the employee is not performing work, you do not include that pay in the overtime rate.
  • Reimbursable expenses for business travel (e.g., transportation, living expenses away from home, etc.) — as long as the reimbursements are the reasonably approximate amount of the expenses.
  • Other payments that do not depend on hours worked, such as parking benefits, wellness programs, gym memberships, employee discounts on retail goods and services, some tuition benefits, adoption assistance, free coffee or pantry at the office, etc.
  • Sums paid as gifts, as long as they are not measured by or dependent on hours worked, production, or efficiency. The rule gives a Christmas bonus as an example.
  • Contributions to certain employee benefits plans.

So, What About Nondiscretionary Bonuses?

You still have to count nondiscretionary bonuses in the regular rate. So, if the bonus has components that make it look earned (e.g., bonuses for attendance, production, etc.) or that were promised as part of a contract or agreement (e.g., signing bonus, collectively bargained bonuses), you need to count them in the overtime rate.

The rule makes clear that what you call the bonus does not govern whether it is excludable:

Labels are not determinative. The label assigned to a bonus does not conclusively determine whether a bonus is discretionary under section 7(e)(3). . . . Thus, regardless of the label or name assigned to bonuses, bonuses are discretionary and excludable if both the fact that the bonuses are to be paid and the amounts are determined at the sole discretion of the employer at or near the end of the periods to which the bonuses correspond and they are not paid pursuant to any prior contract, agreement, or promise causing the employee to expect such payments regularly.

To be discretionary, the bonus cannot be promised in advance. Additionally, the employer gets to decide whether the bonus is paid and the amount and, the employer should make those decisions around the time the bonus is paid. Although the facts of each situation govern, the rule gives a number of examples of excludable, discretionary bonuses:

  • A bonus to employees who made unique or extraordinary efforts that 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

Now what?

This rule goes into effect January 15, 2020. If you have nonexempt employees whose compensation is more complicated than a straightforward hourly rate, it is worth a look at this new rule to make sure you are properly calculating your overtime rates.