On December 16, 2019, the US Department of Labor (“DOL”) published a final rule (the “Rule”), revising the regulations at 29 CFR Part 778 and providing clarity regarding which employee perks and benefits can be excluded when calculating overtime pay under the Fair Labor Standards Act (“FLSA”). The Rule marks the first significant update to the regulations governing the “regular rate” requirements under the FLSA in over fifty (50) years. In its announcement of the Rule, the DOL acknowledged that “[t]he previous regulatory landscape left employers uncertain about the role that perks and benefits play[ed] when calculating the regular rate of pay.” The Rule provides helpful clarifying examples and provides insight into the DOL’s views on the appropriate treatment of specific benefits and took effect on January 15, 2020.
What is the Regular Rate?
The FLSA requires employers to pay non-exempt employee overtime at least one and one-half times their “regular rate” for all hours worked in excess of forty (40) hours in a workweek. However, an employee’s regular rate covers more than just his or her hourly rate of pay. The FLSA defines the regular rate as “all remuneration for employment paid to, or on behalf of, the employee,” subject to certain exclusions outlined in Section 7(e). See 29 USC §207(e). In addition to base hourly wages, examples of types of pay that must be included in the regular rate are non-discretionary bonuses, commissions and shift differentials.
Clarifications under the Rule
The Rule confirms that employers may exclude the following benefits and/or perks from the regular rate calculation:
- Parking benefits, wellness programs, onsite specialist treatments, gym access and fitness classes, employee discounts on retail goods and services, certain tuition benefits, and adoption assistance;
- Unused paid leave, including paid sick leave and paid time off;
- Certain penalties employers must pay under state and local scheduling laws, such as those in effect in California and New York;
- Reimbursements for expenses, including cell phone plans, credentialing exam fees, organization membership dues and travel expenses that don't exceed the maximum travel reimbursement under the Federal Travel Regulation system or the optional Internal Revenue Service substantiation amounts for certain travel expenses;
- Certain sign-on and longevity bonuses;
- Complimentary office coffee and snacks;
- Discretionary bonus; and
- Contributions to benefit plans for accidents, unemployment, legal services and other events that could cause a financial hardship or expense in the future.
The Rule also provides clarification regarding discretionary bonuses that are excluded from the regular rate. Specifically, the Rule explains that it is not the label or name given to a bonus that determines whether it is discretionary. Instead, a discretionary bonus must be paid at the sole discretion of the employer and not pursuant to any contract, agreement or promise causing the employee to expect the payment. If a bonus is promised, it is not considered discretionary and must be included in the regular rate of pay. Under the Rule, the following are examples of discretionary bonuses that can be excluded from overtime calculation:
- Severance bonuses;
- Referral bonuses for employees not primarily engaged in recruiting;
- Bonuses for overcoming challenging or stressful situations; and
- Employee-of-the-month bonuses.
The Rule provides helpful guidance and more certainty for employers in calculating overtime payments under the FLSA. Now is a good time for employers to decide if they want to provide certain perks and benefits to employees, without concern about overtime liability. Additionally, employers should consider auditing their regular rate practices, to ensure they are in compliance with the FLSA and applicable state and local law. Legal counsel can assist in evaluating the available options and weighing the associated costs and benefits to help employers make individualized decisions that will be best for their particular business
If you have any questions about this legal update, please do not hesitate to reach out to any of your contact(s) on the Morris, Manning & Martin, LLP Employment team.