In a move that could benefit both employers and employees, today the Department of Labor (DOL) published its final rule updating the requirements for calculating an employee's regular rate of pay under the Fair Labor Standards Act ("FLSA"). Under the FLSA, employers must pay non-exempt employees overtime for all hours worked over 40 hours per work week. Such overtime is paid at 1.5 times an employee's regular rate of pay, which includes "all remuneration for employment paid to, or on behalf of, the employee," divided by the number of hours worked. While most monetary forms of compensation and payments must be included in the regular rate of pay (e.g., salaries, nondiscretionary bonuses, commissions, etc.), the DOL's regulations allow certain categories of payments to be excluded from the regular rate.
Unfortunately, the prior regulatory language governing calculation of the regular rate is more than 50 years old and does not address modern-day perks and benefits that were not offered at the time. This created uncertainty for employers as to whether the cost of more contemporary benefit offerings and incentives (such as wellness programs, gym and fitness programs, varying forms of paid time off, etc.) were required to be included in the regular rate of pay. The DOL's new final rule, which takes effect on January 15, 2020, helps eliminate that uncertainty and, according to the DOL, "provides clarity that allows employers to provide more benefits to their employees without unknown overtime consequences or litigation." In particular, the final rule makes it clear that employers do not have to include the following payments and benefits in the regular rate when calculating overtime:
- Cost of parking benefits, wellness programs, nutrition classes, smoking cessation programs, exercise and weight loss programs, financial wellness and counseling programs, on-the-job medical care, onsite specialist treatments, gym access/memberships, fitness classes, and recreational facilities;
- Employee discounts on retail goods and services;
- Certain tuition benefits (whether paid to the employee, an education provider or a student loan program);
- Adoption assistance;
- Payments for unused paid leave, paid sick leave, or other paid time off;
- Payments for certain penalties required under state and local laws related to scheduling;
- Reimbursements for expenses including cellphone plans, credentialing exam fees, membership dues, and certain travel expenses (even if such expenses are not incurred solely for the benefit of the employer);
- Certain sign-on and longevity bonuses;
- Free office coffee and snacks;
- Discretionary bonuses; and
- Contributions to benefit plans for accidents, unemployment, legal services and other events that might cause future financial hardship or expense.
With respect to discretionary bonuses, the final rule emphasizes that the label given to a bonus does not determine whether it qualifies as discretionary; rather, the facts specific to the bonus at issue will be used to determine whether it may be excluded from the regular rate. Specifically, under the rule, bonuses are discretionary and excludable from the regular rate only if both of the following conditions are met: (i) the fact that the bonus will be paid and the amount of the payment are determined at the sole discretion of the employer at or near the end of the period to which the bonus corresponds and (ii) the bonus is not paid pursuant to any prior contract, agreement, or promise causing the employee to expect the payment. For instance, discretionary bonuses may include bonuses recognizing an employee's special or extraordinary efforts, referral bonuses (for employees other than recruiting personnel), severance bonuses, bonuses for overcoming challenging circumstances, employee-of-the-month bonuses, and other similar bonuses that are not promised in advance. However, sign-on bonuses, longevity or retention bonuses, and most attendance and production bonuses related to quality and accuracy of work are generally not discretionary and must be included in the regular rate calculation.
Finally, the final rule contains additional information clarifying the treatment of "call-back" pay and provides that call-back payments that are not prearranged and are in excess of the hours actually worked by the employee are excludable from the regular rate of pay, but may not be credited against any overtime obligations.
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