Under the Fair Labor Standards Act (FLSA), employers must generally pay non-exempt employees overtime at a rate of one and one half times the “regular rate” of pay when they work more than forty hours in a workweek. Overtime cannot be properly calculated unless the employer knows what to include in the regular rate. As benefits, bonuses, reimbursements and other elements of compensation have evolved, greater ambiguity has developed in determining what is included in and excluded from the regular rate. On March 29, 2019, the Department of Labor (“DOL”) published a proposal (found here) to clarify and update several regulations that interpret the regular rate of pay requirement.

An employee’s “regular rate” of pay is not necessarily a non-exempt employee’s hourly rate or hourly rate equivalent. The term “regular rate” is not defined in the FLSA itself, and the FLSA regulations provide the primary source of how the term has been defined. However, those regulations have not been amended comprehensively for more than 50 years.

The proposed changes provide some modernization of the existing regulations that define “regular rate” and should assist employers by clarifying that a number of currently utilized workplace perks and benefits are not part of the regular rate calculation. In publishing the proposals, DOL stated that the proposed changes “would better define the regular rate for today’s workplace practices.”

Under the proposed rules, a number of commonly provided benefits and perks for employees would properly be excluded from the regular rate. This includes the value of wellness benefits like nutrition classes or gym access, along with programs such as employee discounts and tuition reimbursement. The proposal also clarifies that payments for unused paid leave (regardless of whether it is characterized as PTO, vacation, sick leave, or some other way) is excludable from the regular rate. Similarly, the proposed regulations seek to provide employers with more clarity regarding excluding reasonable travel and reimbursement expenses from the regular rate, and further clarify when items like discretionary bonuses and “show up” or “call back” pay may be excluded from overtime calculations. The proposed rule would not change the current regulations regarding inclusion of non-discretionary and production-based bonuses in the regular rate.

The proposed regulations are silent on cash allowances paid directly to employees for certain benefits in lieu of providing the benefit more directly. For example, the proposed regulations do not indicate whether a cash allowance towards a fitness club membership (as opposed to the employer providing fitness club access through a corporate membership) would be excludable (even if the employee is required to show proof of the membership). However, there is language in the Preamble explanation of the proposed regulations suggesting that such cash allowances would probably have to be included as compensation when determining the regular rate.

While the proposed regulations provide more clarity and additional and more modern examples of what items are excludable when determining the regular rate for overtime calculation purposes, the changes (at least as currently proposed) will probably not affect most employers’ current pay practices in most situations. As with the recently proposed change to the minimum salary threshold, DOL has published additional information about the proposal, which can be found here. The agency is accepting comments regarding these changes for sixty days or until May 29. (Spencer Fane is available to assist client employers or associations of employers with comments on the proposed regulations, to respond to questions raised in the Preamble by the DOL or to propose additional guidance to be included in the regulations.) A final rule, which may vary from the current proposal, is expected to be published later this year.

Key Takeaways

  1. Employers should continue to carefully analyze compensation provided to non-exempt employees, including bonus programs, to ensure they are properly determining the “regular rate” when calculating overtime pay. Bonus programs are one area in which employers occasionally make overtime errors.
  2. Employers should evaluate current and potential additional compensation and benefit offerings and determine whether expanding their programs is more feasible given the clarifications, in the event that the proposed regulations go into effect.