Employees appreciate employee discounts, tuition reimbursement, prizes of small value, and wellness benefits. But those perks had been put in danger in recent years by lawsuits claiming that employers should have paid overtime on their value. On December 12, 2019, the U.S. Department of Labor saved these and other welcomed extras by issuing revised regulations clarifying when employers need not pay overtime on perks.
The final rule revises the regulations at 29 CFR Part 778 to clarify and update the "regular rate" requirements under section 7(e) of the Fair Labor Standards Act (FLSA), 29 USC §207(e), focusing on the types of compensation that employers must include in the overtime calculation.
Background on Regular Rate
The FLSA requires that employers pay non-exempt employees overtime at 1.5 times their regular rate for all hours worked over 40 in a workweek. The regular rate is not just an employee's hourly rate of pay, but rather includes "all remuneration for employment" unless specifically excluded by section 7(e) of the FLSA.
Examples of types of pay that must be included in the regular rate in addition to base hourly wages include non-discretionary bonuses, commissions and shift differentials. Because these types of compensation are included in the regular rate, employers pay overtime on them when non-exempt employees work over 40 hours in a week.
The FLSA excludes some types of compensation from the regular rate, such as vacation or holiday pay, the cost of health insurance, employer contributions to retirement accounts, and reimbursements for business expenses. No overtime is due on these amounts.
The Part 778 regulations provide additional guidance on the types of compensation included and excluded from the regular rate and overtime calculation. The regulations have seen only minor updates since 1950, although much has changed in employee compensation over the last 60 years. The law is often unclear regarding whether employers must pay overtime on perks popular in today's workplace.
The Department's final rule updates its interpretations, often providing helpful examples, to clarify what types of compensation employers must and need not include in the regular rate for overtime pay purposes.
Under the FLSA, employers must pay overtime on non-discretionary bonus, but not on discretionary bonuses. The definition of "discretionary" in the FLSA, however, is different from that used in common vernacular. To be discretionary, the bonus cannot be announced to the employee in advance and the amount of the payment must not be determined under any formula based on standard metrics (e.g., hours worked, performance, revenue, profit). Stating in a bonus plan that it is discretionary does not make it so. Employers often struggle in determining whether a bonus is discretionary or non-discretionary. The final rule includes new examples of discretionary bonuses that employers need not include in the overtime calculation:
- Bonuses 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; and
- Employee-of-the-month bonuses.
Reimbursement for Expenses
Reimbursement of business expenses is excludable from the regular rate if the amount of the reimbursement is "reasonably approximate" to actual expenses incurred. If the reimbursement is too low, a minimum wage violation can result. If the reimbursement is too high, the excess amount is included in the regular rate and overtime is due. Employers have long struggled with finding that middle sweet spot that will not result in FLSA liability.
In the final rule, the Department first clarified that reimbursement of the actual cost of cell phones, organizational membership dues, and credentialing exam fees need not be included in the regular rate. More importantly, the Department provided a presumption of FLSA compliance if an employer reimburses travel expenses at the Federal Travel Regulation (FTR) or IRS rates. A new section provides that the presumption does not create an inference that reimbursements exceeding the FTR or IRS rates must be included in the regular rate. The Department left unanswered the important question of whether reimbursements at less than the FTR or IRS rates, without more, can establish a minimum wage violation.
Pay for Time not Worked
In the final rule, the Department also added new examples of paid leave and time off that need not be included in the overtime calculation:
- Family medical leave;
- Bereavement leave;
- Military service leave;
- Time off to vote;
- Time off to attend child custody or adoption hearings;
- Time off to attend school activities;
- Time off to donate organs, bone marrow, or blood;
- Time off to serve as a voluntarily first responder; and
- Any paid leave required under state or local laws.
As wellness programs are a more recent development, the prior regulations had not addressed wellness benefits at all. The Department has corrected that omission by providing that the cost of most wellness benefits are not includable in the overtime calculation, including:
- The cost of specialist treatment provided to employees onsite, such as chiropractors, massage therapists, personal trainers, counselors, employment assistance programs, or physical therapists;
- The cost of providing employees with gym access, gym memberships, fitness classes, and recreational facilities and
- The cost of providing wellness programs, such as health risk assessments, biometric screenings, vaccination clinics (including annual flu vaccinations), nutrition classes, weight loss programs, smoking cessation programs, stress reduction programs, exercise programs, coaching to help employees meet health goals, financial wellness programs or financial counseling, and mental health wellness programs.
Increasingly common is the popular perk of assisting employees with educational expenses. Unfortunately, in the "no good deed goes unpunished" category, some employers have been sued for failing to pay overtime on the value of such programs. The Department has provided a definitive answer to this issue to the benefit of employer and employee alike. The final rule excludes from the regular rate the following amounts, whether paid directly to the employee, education provider, or through a third-party provider:
- Tuition reimbursement for employees;
- Tuition reimbursement for an employee's family members;
- Student loan repayment; and
- Discounts on online courses or continuing education programs.
Other Exclusions from the Regular Rate
The final rule has another common theme: Payments that do not depend on hours worked, services rendered, job performance, or other criteria that depend on the quality or quantity of the employee's work do not need to be included in the regular rate. Some examples from the final rule include:
- Compensation for meal periods;
- Discounts on employer-provided retail goods and services;
- Discounts on hotel rooms and travel;
- The cost of snacks, drinks or a meal on a special occasion (but not regular meals);
- Parking spaces and benefits;
- Adoption assistance;
- The cost of small items such as coffee cups and t-shirts;
- Accident, unemployment and legal services benefits;
- Payouts to employees of unused vacation and sick leave;
The new rule is effective January 15, 2020.
Employers should consider taking the opportunity created by the final rule to conduct an audit of their overtime calculations. Such an audit is not complex and can be completed in only a few hours or days. Start by pulling a list of earning codes from your payroll system. Identify the codes tracking compensation paid to non-exempt employees. Determine whether those codes are currently included or excluded from the regular rate and overtime calculation, and whether that treatment is consistent with the new rule. Employers may find that some earnings codes included in the regular rate may be excluded, or vice versa. Employers that find an earnings code has been inappropriately excluded from the overtime calculation should consider the Labor Department's voluntary correction program, PAID. Learn more about PAID at www.dol.gov/whd/PAID.
Finally, with no risk of overtime liability, employers can now consider providing some of these perks to their employees.
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.