On March 29, 2019, the U.S. Department of Labor (DOL) published a Notice of Proposed Rulemaking (NPRM) under the Fair Labor Standards Act (FLSA). The proposed rules will clarify for employers what types of compensation must be included when determining an employee’s “regular rate” in order to determine the overtime rate. This is a conversation I have with various employers weekly and will be welcome guidance.
Recall, overtime is time and one-half the “regular rate”. Currently, given the extremely outdated regulations and changes in payments to employees (i.e. more fringe benefits such as tuition reimbursement, etc.), employers are understandably confused whether certain payments for employee perks must be included into the employee’s regular rate calculation. For example, if an employee works 40 hours and makes $400 a week, the employee’s regular rate is $10/hr. Easy enough. However, if that employee is provided a $100 discretionary bonus that week because the company was doing well, the regular rate remains the same. Easy, if you don’t misidentify a non-discretionary bonus as a discretionary bonus. However, if the employee earns a $100 non-discretionary bonus (i.e. sales incentive plan or other bonus that the employee knows how to earn), the regular rate is $500/40 = $12.50/hr. Thus, the overtime rate increases.
The proposed rule will clarify which payments, perks and other benefits must be included in the employee’s “regular rate”. As currently drafted, the following payments are proposed to be excluded from the definition of “regular rate”:
- Costs of providing wellness programs, onsite specialist treatment, gym access and fitness classes, and employee discounts on retail goods and services.
- Payments for foregoing holidays or paid leave (including sick pay, holiday, vacation, etc). For example, if an employee is paid to work on a holiday and also receives holiday pay (like those not working) – the holiday pay may be excluded from overtime.
- Payments for bona fide meal periods. Unless there is an agreement to pay for such time as hours worked, paid meal periods would be excluded.
- Reimbursed expenses (not just those “solely” for the employer’s benefit).
- Reimbursed travel expenses that do not exceed the maximum travel reimbursement permitted under the Federal Travel Regulation System regulations and which meet other regulatory requirements (ensuring that it is “reasonable”).
- Certain overtime premiums under FLSA Section 7(e)(5) and (6) even without a prior formal contract with employees to exclude such time.
- Pay for time that wouldn’t qualify as “hours worked”, such as bona fide meal periods (unless agreement or established practice shows that the parties have treated the time as as hours worked).
- Certain discretionary bonuses.
- Certain tuition programs (such as reimbursement or repayment of educational debt) so long as not tied to hours worked and optional.
- “Call-back”, “show-up” etc. pay that is not prearranged and that is not the pay for the actual hours worked.
- Employee discounts on retail goods or services (as long as not tied to an employee’s hours worked or services provided).
In short, the more compensation an employee earns, the greater their “regular rate”. The greater the regular rate, the greater the overtime. Thus, clarity in this regard will assist employers (and make it easy to show employees) in properly excluding additional non-work payments from the employee’s regular rate.