If an hourly employee makes $10/hour, overtime is not always $15/hour.
This is because overtime is not tied to an employee’s “hourly” rate. Rather it is tied to the employee’s “regular” rate, which may be more than the hourly rate.
On December 12, 2019, the U.S. Department of Labor (Department) announced a Final Rule, which is 162 pages long, that will allow employers to more easily offer perks and benefits to their employees.
The rule marks the first significant update to the regulations governing regular rate requirements under the Fair Labor Standards Act (FLSA) in over 50 years. Those requirements define what forms of payment employers include and exclude in the FLSA’s “time and one-half” calculation when determining overtime rates.
The previous regulatory landscape left employers uncertain about the role that perks and benefits play when calculating the regular rate of pay. The new Labor Department rule clarifies which perks and benefits must be included in the regular rate of pay, as well as which perks and benefits an employer may provide without including them in the regular rate of pay.
The Department of Labor recently clarified the regulations to confirm that employers may exclude the following from an employee’s regular rate of pay:
- the cost of providing certain parking benefits, wellness programs, onsite specialist treatment, gym access and fitness classes, employee discounts on retail goods and services, certain tuition benefits (whether paid to an employee, an education provider, or a student-loan program), and adoption assistance;
- 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 including cellphone plans, credentialing exam fees, organization membership dues, and travel, even if not incurred “solely” for the employer’s benefit; and clarifies that reimbursements that do not exceed the maximum travel reimbursement under the Federal Travel Regulation System or the optional IRS substantiation amounts for travel expenses are per se “reasonable payments”;
- certain sign-on bonuses and certain longevity bonuses;
- the cost of office coffee and snacks to employees as gifts;
- discretionary bonuses, by clarifying that the label given a bonus does not determine whether it is discretionary and providing additional examples and;
- contributions to benefit plans for accident, unemployment, legal services, or other events that could cause future financial hardship or expense.
The Department of Labor’s Final Rule also includes additional clarification that the label given a bonus does not determine whether it is discretionary, and provides fact-based examples of discretionary bonuses that may be excluded from an employee’s regular rate of pay under section 7(e)(3) of the FLSA.
Examples of bonuses that may be discretionary include bonuses to employees who made unique or extraordinary efforts which 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, employee-of-the-month bonuses, and other similar compensation. Such bonuses are usually not promised in advance and the fact and amount of payment is in the sole discretion of the employer until at or near the end of the period to which the bonus corresponds.
Additionally, the Department of Labor made two substantive changes to the existing regulations. First, the Labor Department eliminated the restriction in §§ 778.221 and 778.222 that “call-back” pay and other payments similar to call-back pay must be “infrequent and sporadic” to be excludable from an employee’s regular rate, while maintaining that such payments must not be prearranged. Second, the Labor Department updated its regulations pertaining to the “basic rate,” which is authorized under section 7(g)(3) of the FLSA as an alternative to the “regular” rate under specific circumstances. Under the Final Rule, employers using an authorized ‘basic” rate may exclude from the overtime computation any additional payment that would not increase total overtime compensation by more than 40 percent of the higher of the applicable local, state, or federal minimum wage a week on average for the overtime workweeks in which the employer makes the payment.
The Final Rule will publish on December 16, 2019, in the Federal Register, with an effective date of January 15, 2020.