The U.S. Department of Labor (DOL) issued proposed rules that would update the regulations governing what forms of compensation are included and excluded from the calculation of overtime under the Fair Labor Standards Act (FLSA). The proposed rules are intended to clarify and, in some cases, simplify, the overtime calculation under federal law. To ensure their employees are paid correctly, employers should avoid the prevalent assumption that overtime pay calculation simply involves multiplying an employee’s hourly wage by 1.5. Rather, under the FLSA, the overtime calculation is far more detailed and complex.

The comment period for the proposed rules closes on May 28, 2019. Employers should review their overtime and other relevant payment plans to ensure compliance with state and federal law.

The DOL issued the proposed rules on March 29, 2019 to provide clarity for understanding the calculations that form the basis for an employee’s “regular rate of pay.” Unless an employee (or the employer) satisfies an overtime exemption, the FLSA requires an employer to pay an employee overtime whenever the employee works more than 40 hours during any given workweek. Under the FLSA, overtime is paid at one and one-half times an employee’s “regular rate of pay.” Superficially, this seems like simple math. However, the “regular rate of pay” is a term of art under the FLSA. It includes “all remuneration for employment” paid to an employee by the employer, subject to eight specific exceptions, known as the “statutory exceptions,” divided by the hours worked during the workweek in question for which such remuneration was paid. The “statutory exceptions” are as follows:

  • Sums paid as gifts or payments in the nature of gifts at holiday time or on other special occasions. The amounts of which are not measured by or dependent upon hours worked, production or efficiency;
  • Payments made for occasional periods when no work is performed due to vacation, holidays, illness, failure of the employer to provide sufficient work or other similar cause; reasonable payments for traveling expenses or other expenses incurred by the employee in furtherance of the employer’s interests for which the employee is reimbursed; and other similar payments to an employee which are not made as compensation for hours of employment;
  • Payments made in recognition of services performed provided the fact of the payment and amount of the payment are at the sole discretion of the employer and not pursuant to any prior contract, agreement or promise;
  • Contributions irrevocably made by an employer to a trustee or third person pursuant to a bona fide plan for providing old-age, retirement, life, accident, or health insurance and other similar benefits;
  • Extra compensation provided by a premium rate paid for certain hours worked by the employee because such hours are in excess of eight (8) in a day or forty (40) in a week or in excess of the employee’s normal working hours or regular working hours as the case may be;
  • Extra compensation provided by a premium rate for working on weekends, holidays, regular days of rest or the sixth or seventh day of the workweek provided such premium rate is not less than one and one-half times the rate established in good faith for like work performed in non-overtime hours on other days;
  • Extra compensation paid to an employee pursuant to an applicable employment contract or collective bargaining agreement for work outside of the hours established by such contract or agreement provided such extra compensation is paid at rate not less than one and one-half times the rate established in good faith for like work performed during such work day or workweek; or
  • Any value or income derived from employer-provided grants or rights pursuant to a stock option, stock appreciation right or bona fide employee stock purchase plan.

Since the regulations regarding the regular rate of pay were last updated nearly 60 years ago, there have been a number of perks and other rewards that employers provide to employees and it is unclear whether such perks and rewards are included or excluded from the regular rate of pay. For example, are the cost of gym memberships, fitness classes, wellness programs, management coaching, stress reduction programs, paid time off and mandatory sick leave included or excluded from the regular rate of pay? The DOL’s proposed rules try to address these issues.

Specifically, the DOL intends to update federal regulations concerning the regular rate of pay to reflect changes in the modern workplace and to incentivize employers to provide employees with more employee benefits without worrying about their impact on the regular rate of pay—and ultimately the calculation of overtime. In short, the DOL proposes clarifications to confirm that employers may exclude from the employee’s regular rate of pay the following:

  • The cost of providing wellness programs, onsite specialist treatment, gym membership and fitness classes, and employee discounts on retail goods and services;
  • Payments for unused paid leave, including paid sick leave and paid time off or “PTO”;
  • Reimbursed expenses, even if not incurred “solely” for the employer’s benefit;
  • Reimbursed travel expenses that do not exceed the maximum travel reimbursement under the Federal Travel Regulation System and that satisfy other regulatory requirements;
  • Discretionary bonuses, by providing additional examples and clarifying that the label given a bonus does not determine whether it is discretionary;
  • Benefit plans, including accident, unemployment and legal services; and
  • Tuition programs, such as reimbursement programs or repayment of educational debt.

The proposed rules also includes additional clarification about other forms of compensation, including payment for meal periods, “call back” pay, “show up” pay and other forms of payment that may be required by state or local law or an applicable contract or agreement. More details about the proposed rules are described below.

Excludable Compensation Under FLSA Section 7(e)(2)

Occasional Periods When No Work Is Performed

The DOL has clarified that when payment for all forms of accrued but unused leave, including holiday, vacation, and sick leave, is the approximate equivalent of the employee’s normal earnings, they are excluded from regular rate of pay for overtime purposes. Previously, it was unclear whether a cash out at year end of an employees’ accrued, but unused, leave time was excluded from the regular rate of pay. It was also unclear whether payments made pursuant to a paid time off policy, which employees could use for any purpose, were excluded from the regular rate of pay. The proposed rules clarify that these and related payments are indeed excluded from the regular rate of pay.

Further, the regulations currently state that “lunch periods” when no work was performed is not counted as hours worked and any payment made for such periods does not need to be included in the regular rate of pay. However, there was confusion if the regulation applied to meal periods other than lunch. Accordingly, the DOL proposed a revised rule that states that, bona fide meal periods (when the employee is relieved of all duties) will not be considered “hours worked” for purposes of minimum wage or overtime requirements and employers are not required to compensate employees for such time. Further, if an employer pays an employee for such meal periods, the compensation can be excluded from the regular rate.

Similarly, call-back pay, show-up pay, and similar types of payments that are required by state or local law or contract, which require an employer to pay an employee a specified amount, but where the employee does not actually perform any work, can be excluded from the regular rate when the payments are infrequent and sporadic. The parameters of when such payments are “infrequent and sporadic” remain ill-defined under the DOL’s proposal and will likely be determined on a case-by-case basis.

Reimbursable Expenses

The DOL also proposes clarifying what is a reimbursable expense because, as written, the regulations require any reimbursable expense that is “disproportionately large” to be included in the regular rate. To determine what is reasonable and properly reimbursable, the new rule would refer to the Federal Travel Regulation. This change makes it clear that if an employee is traveling on behalf of the employer, the expense is per se reasonable if it is at or beneath the maximum reimbursable amount allowed under the Federal Travel Regulation.

Other Similar Payments

Under the law, payments that have no connection to the quantity or quality of an employee’s work are also excludable from the regular rate. As such, the new rule attempts to clarify that when an employer provides benefits unconnected to the quantity or quality of an employee’s work, such compensation is not included in the regular rate of pay. A wage supplement, however, even when not directly tied to performance or hours is still compensation for hours of employment. For example, production bonuses and the cost of furnished board, lodging or facilities are compensation for services rendered and therefore must be included in the regular rate. The DOL provides some examples of “other similar payments” that would, however, be excludable from the regular rate including the cost of personal trainers, chiropractors, physical therapists, gym access, gym membership, fitness classes, wellness programs, employee discounts on retail goods and tuition reimbursements.

Discretionary Bonuses Under FLSA Section 7(e)(3)

Typically, when an employer retains discretion over the fact and amount of a bonus, the bonus will not be included in the regular rate of pay, but where the bonus is paid pursuant to a prior contract, agreement, or promise, it is considered non-discretionary and included in the regular rate. The DOL proposes adding a section that would provide examples of bonuses that are non-discretionary and seeks comment from the public to determine what other common bonuses should be addressed by the rule.

Excludable Benefits Under FLSA Section 7(e)(4)

Under the FLSA, contributions to a bona fide plan for old-age retirement, life, accident or health insurance, or similar benefits are excluded from regular rate. Currently, the regulation provides that in order to be excluded from the regular rate, the plan’s primary purpose must be to provide benefits to employees on account of, “death, disability advanced age, retirement, illness, medical expenses, hospitalization, and the like.” The DOL proposes adding more examples of modern benefit plans that may be excludable and welcomes comments from the public on this issue.

After the new rules are issued, employers should consider re-evaluating their overtime practices to ensure that compliance with the new rule. We encourage employers to consult with legal counsel before implementing or revising their policies to ensure they comply with all state and federal laws.