On December 12, 2019, the U.S. Department of Labor (DOL) announced a final rule that may incentivize employers to offer more perks and benefits to their nonexempt employees. The final rule takes effect on January 15, 2020, and updates existing regulations regarding what employers must include in a nonexempt employee's "regular rate" of pay for purposes of calculating overtime pay under the Fair Labor Standards Act (FLSA). Specifically, the final rule identifies perks and benefits that employers may exclude in calculating an employee's regular rate of pay.
We discussed the DOL's proposed rule, issued on March 29, 2019, in a previous Alert.
The Regular Rate
The FLSA generally requires employers to pay nonexempt employees one and one-half times their regular rate for all hours worked over 40 in a workweek. The FLSA defines "regular rate" as "all remuneration for employment paid to, or on behalf of, the employee," subject to certain exclusions. 29 U.S.C. § 207(e). Under existing DOL regulations, various perks of employment and other forms of compensation (e.g., nondiscretionary bonuses, commissions) need to be included in the employer's calculation of the regular rate for overtime purposes, while certain other perks and forms of compensation (e.g., discretionary bonuses) can be excluded when calculating the regular rate.
Compensation packages are ever-evolving, however, and employer-provided perks and benefits now constitute approximately one-third of total compensation. In this modern landscape, existing DOL regulations offer little guidance regarding what must be included in an employee's regular rate of pay and the types of compensation, perks and benefits that can be excluded. The new rule accounts for changing pay practices and clarifies whether certain employment perks and benefits must be included in the regular rate of pay. The final rule permits employers to exclude "payments that do not depend on hours worked, services rendered, job performance, or other criteria that depend on the quality or quantity of the employees' work."
Perks That May Be Excluded from the Regular Rate
The final rule contains the following nonexclusive list of perks and benefits that employers may exclude when calculating employees' regular rate of pay:
- The cost of providing parking benefits and employer-provided parking spaces (but not commuter subsidies);
- The cost of providing onsite treatment from specialists such as chiropractors, massage therapists, physical therapists, personal trainers, counselors or employee assistance programs;
- The cost of providing gym access, gym memberships, fitness classes and recreational facilities (whether onsite or offsite);
- The cost of providing wellness programs, including health risk assessments, biometric screenings, vaccination clinics (including annual flu vaccinations), nutrition classes, weight loss programs, smoking cessation programs, stress reduction programs and coaching to help employees meet health goals;
- The cost of providing financial wellness programs and financial counseling;
- The cost of providing mental health wellness programs;
- Discounts on retail goods and services, such as beverage, food, hotel and travel discounts;
- Tuition benefits, including payments for an employee's current coursework, online coursework, an employee's family members' tuition and student loan repayment programs;
- Adoption assistance, including financial assistance, legal services, information and referral services, and paid or unpaid leave;
- The cost of providing office coffee, snacks and meals for special occasions (such as a celebratory pizza lunch);
- Certain sign-on and longevity bonuses;
- Discretionary bonuses (clarifying that the label given a bonus does not determine whether it is discretionary);
- Payments for unused paid leave, including paid sick leave or paid time off;
- Payments of certain penalties required under state and local scheduling laws;
- Reimbursed expenses for supplies, tools, materials, cellphone plans or equipment, exam fees or organization membership dues and reasonable travel expenses, even if not incurred "solely" for the employer's benefit (travel reimbursements equal to or less than the Federal Travel Regulation rates or the IRS substantiation amounts for travel expenses are per se "reasonable payments");
- Contributions to benefit plans for accident, unemployment, legal services or other events that could cause future financial hardship or expense; and
- Call-back payments, or additional compensation for calling an employee back to work after the employee's scheduled hours have ended (call-backs cannot be prearranged, but no longer need to be "infrequent" or "sporadic" to be excludable).
Notably, however, the final rule cautions that employers cannot exclude perks and benefits that are actually "wages in another guise." When a payment is considered a wage supplement, even if not tied directly to employee performance or hours worked, it is still compensation for purposes of regular rate of pay. For example, production bonuses and the cost of furnished board, lodging or facilities are compensation for services and are not excludable from regular rate of pay.
What This Means for Employers
The final rule provides much-needed clarity for calculating the regular rate of pay for overtime purposes in light of constantly evolving perks and benefits provided to employees. The updated regulations may encourage employers to get creative and provide additional perks and benefits in their compensation packages without the fear of increased overtime costs and legal liability. Perks such as gym memberships, tuition reimbursement and employee discounts can help attract talent and motivate current employees.
However, employers should still take a careful look at their pay practices to ensure that they include compensation tied to "quality or quantity of the employees' work" in regular rate of pay calculations. Employers should consider evaluating their pay practices with the assistance of counsel to maximize their ability to offer more competitive compensation packages without increasing overtime costs and minimize the risk of class action lawsuits.
For Further Information
If you have any questions about this Alert, please contact Christopher D. Durham, Elisabeth Bassani, any of the attorneys in our Employment, Labor, Benefits and Immigration Practice Group or the attorney in the firm with whom you are regularly in contact.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.