United States: The U.S. Department Of Labor Announces Proposed Rules To Clarify Regular Rate Of Pay And Determine Joint Employer Status

Last Updated: May 16 2019
Article by Alison G. Renner

In a recent post, we discussed the U.S. Department of Labor's (DOL) proposed rule increasing the salary threshold to qualify for a white collar exemption under federal law. In response, many employers are evaluating whether to reclassify employees as non-exempt instead of raising salaries to maintain the exemption. Along with this analysis, employers often struggle with two related issues: (1) how to calculate the regular rate of pay of non-exempt employees in order to calculate the proper overtime rate and (2) who is considered an "employer" and thus responsible for employee wages?

The DOL recently announced two proposed rules that will help employers tackle these issues, which we discuss in turn below. Acknowledging that the DOL has not updated its rules in over a half century, the proposed amendments seek to reflect modern developments in the employer-employee relationship.

"Regular Rate" - Excludable Compensation

The first proposed rule would clarify which payments and benefits factor into an employee's regular rate. Calculating the regular rate can get complicated when considering whether bonuses, paid leave, expense reimbursements and other benefits must be included in an employee's base rate of pay. The regular rate serves as the basis of the overtime rate (i.e., 1.5 x regular rate = overtime rate), so getting this right is imperative for employers. In addition, requiring employers to include certain categories of compensation and benefits in the regular rate not only complicates the calculation, but also inflates the overtime rate.

The proposed amendments enumerate categories of compensation that are excludable from the regular rate:

  1. Pay for Unused Holidays and Sick Leaves. The DOL excludes from the regular rate any compensation for any form of unused vacation, holiday, illness, or other similar leave if the compensation is approximately equal to the employee's normal earnings. For example, when an employee works instead of using holiday leave, and receives pay for the holiday leave in addition to pay for hours of work performed, the amount of pay for the foregone holiday leave is excluded from the regular rate. The amendment specifically abolishes the distinctions between sick leave, vacation time and other similar types of leave for purposes of determining the regular rate.
  2. Pay for Meal Breaks. The DOL states that meal periods are not considered "hours worked" and the payment for meal periods alone does not convert such time to hours worked and should not be included in calculating the regular rate.
  3. Expense Reimbursement. The DOL clarifies that reimbursements for expenses are excluded, even if not incurred "solely" for the employer's benefit, including "reasonable" travel expenses. Travel expenses are per se "reasonable" if they do not exceed the maximum amounts permitted under the Federal Travel Regulations (FTR), although exceeding the FTR maximum does not necessarily make a reimbursement unreasonable.
  4. Discretionary Bonuses. Discretionary bonuses are not included in the regular rate. The DOL clarifies that a bonus is considered discretionary, regardless of how it is labelled, if the amount of the bonus, and whether the bonus is provided at all, is at the sole discretion of the employer and not paid pursuant to any prior contract, agreement, or promise. Examples in the proposed rulemaking include: employee-of-the-month bonuses, bonuses for unique or extraordinary efforts not based on pre-established criteria, and severance bonuses.
  5. Benefit Plans. Contributions made to employee benefit plans for old-age, retirement, insurance (including, but not limited to, life, accident, health, and unemployment), legal services and other similar benefits would be excluded from the regular rate. The DOL notes that these plans provide specific monetary benefits for events that could cause significant financial hardship.
  6. Cost of Wellness Programs. The DOL clarifies that health risk assessments, biometric screenings, flu vaccinations, nutrition classes, weight loss programs, stress reduction programs, exercise programs and other common wellness programs would be excludable from the regular rate.
  7. Employee Discounts. The DOL clarifies that discounts on retail goods and services would be excludable as long as they are not tied to an employee's hours worked or services rendered.
  8. Tuition Programs and Reimbursement. The DOL clarifies that certain tuition programs are excludable from the regular rate, including: discounts for online courses, continuing education programs, modest tuition-reimbursement programs, programs for repaying education debt, and other similar programs. The DOL has solicited comments from the public specifically with respect to regulating this category of benefits, acknowledging that the current proposal is in response to recent litigation on the subject.

Warning: Don't Forget to Check State Law!

In determining which items must be included in the regular rate, employers must not forget to check applicable state law. State law may delineate different types of compensation that must be included in an employee's regular rate for purposes of calculating overtime and therefore, in certain circumstances the overtime compensation owed to an employee will differ under federal and state law. For example, Massachusetts' state wage and hour regulations exclude all bonuses in determining an employee's regular rate, not just discretionary bonuses as required by the DOL. New York also delineates categories of compensation and benefits that are not part of the regular rate, which largely mirrors the DOL's proposed rule, but also includes gifts and payments in the nature of gifts. Employers should make sure to pay the employee the higher of the federal or state overtime rate.

Joint Employer

The second proposed amendment lays out a new joint employer test for determining who is considered an employer when the work of an employee for one employer simultaneously benefits another entity. In conjunction with clarifying how to determine workers' pay rates, the DOL also seeks to clarify when businesses qualify as joint employers and therefore are responsible for employees' compensation and subject to direct liability for non-payment of wages. The DOL's proposed rule lays out four key factors that it will analyze to determine whether a business is a joint employer:

  1. Whether the business can hire or fire employees;
  2. Whether the business controls their schedules;
  3. Whether the business determines pay rate and how employees are paid; and
  4. Whether the business maintains employee records.

The DOL also notes that "additional" factors can be evaluated if it appears that a business is either "exercising significant control" over employees' work or "otherwise acting directly or indirectly in the interest of the employer in relation to the employee." The DOL also states that the business model of a company, such as a franchisor-franchisee relationship, does not make joint employer status more or less likely.

The proposed joint employer test by the DOL – which would govern entities' obligations under the Fair Labor Standards Act – differs from the test used by other federal agencies. The National Labor Relations Board (NLRB) also recently published a notice of proposed rulemaking to establish the standard for determining joint employer status similar to the DOL's proposal and stressing the importance of the actual control the company exercises over the conditions of employment, not just the potential for control. Both standards dramatically limit the definition of joint employer and reverse previous definitions which held that two entities are joint employers based on the mere existence of the potential to exercise control or indirect control.

Takeaways

Employers should welcome these new proposed rules. The clarification on the calculation of employees' regular rate will certainly mitigate concerns about compliance with overtime wage requirements. Additionally, the new joint employer standard is much more restrictive than the tests currently used by some circuit courts and may result in fewer findings of joint employer liability.

Remember, both proposed rules are in the sixty-day comment period and may undergo material changes prior to the publication of the final rules. Keep in touch on the status of the proposed rules and seek legal advice before making changes to ensure continued compliance.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions