U.S. Department of Labor Issues Final Rule About How to Calculate “Rate of Pay” Under Fair Labor Standards Act

Late last week, the United States Department of Labor (DOL) issued a Final Rule intended to clarify and update a number of the regulations that interpret the requirements for calculating and paying the regular rate under the Fair Labor Standards Act (FLSA). This Final Rule will take effect January 15, 2020.

Under the FLSA, hourly, non-exempt employees are entitled to overtime pay of at least time and one-half their “regular rate of pay” for any hours worked over 40 per workweek. The term “regular rate” includes all remuneration for employment, except for certain exclusions set forth in Section 7(e) of the FLSA such as the following:

  1. sums paid as gifts and payments in the nature of gifts made at Christmas time or on other special occasions, as a reward for service, the amounts of which are not measured by or dependent on hours worked, production, or efficiency;
  2. payments made for occasional periods when no work is performed due to vacation, holiday, illness, failure of the employer to provide sufficient work, or other similar cause;
  3. reasonable payments for traveling expenses, or other expenses, incurred by an employee in the furtherance of his employer’s interests and properly reimbursable by the employer; and other similar payments to an employee which are not made as compensation for his hours of employment;
  4. discretionary bonuses;
  5. irrevocable benefits contributions made by an employer to a trustee or third person pursuant to a bona fide plan for providing old-age, retirement, life, accident, or health insurance or similar benefits for employees;
  6. extra compensation provided by a premium rate paid for certain hours worked beyond an employee’s regular work hours;
  7. extra compensation provided pursuant to an employment contract or collective bargaining agreement, for work outside of the hours established in good faith by the contract or agreement as the basic, normal, or regular workday (not exceeding eight hours where such premium rate is not less than one and one-half times the rate established in good faith by the contract or agreement for like work performed during such workday or workweek); or
  8. any value or income derived from employer-provided grants or rights provided pursuant to a stock option, stock appreciation right, or bona fide employee stock purchase program.

The DOL regulations define those specific forms of payment that employers must include in the regular rate when calculating employees’ overtime rates of pay. The DOL issued its Final Rule in an effort to clarify whether or not certain types of “perks” or other benefits must be included when calculating the regular rate of pay in order to bring the regulations, which have not been updated in over 50 years, in line with employers’ current pay practices.

Key Changes Made to Regulations under the Final Rule

Among the key changes made under the Final Rule are revising the current regulations to make clear that the following perks need not be included in the regular rate when calculating overtime:

  • the cost of 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;
  • unused paid leave, including paid sick leave or paid time off;
  • pay for time that would not otherwise qualify as “hours worked,” including bona fide meal periods, unless an agreement or established practice provides that the parties have treated the time as hours worked;
  • payments of certain penalties required under state and local scheduling laws;
  • reimbursed business expenses such as cellphone plans, credentialing exam fees, organization membership dues, and travel even if such expenses are not incurred “solely” for the employer’s benefit;
  • expenses for travel that do not exceed the maximum travel reimbursement under the Federal Travel Regulation System or the optional IRS substantiation amounts for travel expenses;
  • certain sign-on bonuses and certain longevity bonuses;
  • the cost of office coffee and snacks provided to employees as gifts;
  • discretionary bonuses (clarifying that how a bonus is characterized does not determine whether or not 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.

Additional Examples and Points of Clarification

In the process, the Final Rule provides additional examples of the types of perks and benefits that are excludable from the regular rate, as well as clarification and examples of discretionary bonuses that are excludable from the regular rate, including bonuses to employees who made unique or extraordinary efforts that are not awarded based on 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 not ordinarily promised in advance and are in the sole discretion of the employer until at or near the end of the period to which the bonuses correspond, and, therefore, may be excluded from regular rate calculations

The Final Rule also adopts the interpretation that some longevity and sign-on bonuses will qualify as gifts that may be excludable from the regular rate, if certain requirements are met. For example, if an employee receives a longevity payment as a reward for tenure, and not in accordance with a provision in a collective bargaining agreement or pursuant to a town bylaw, city ordinance, or a policy, and the longevity payment is not directly dependent on hours worked, production or efficiency, it would qualify as a gift that may be excluded from the regular rate.

Likewise, sign-on bonuses with no clawback provision are excludable from the regular rate as such bonuses are granted before any work is performed and such payment is unrelated to hours worked or services provided.

Sign-on bonuses with a clawback provision that are not paid in accordance with a collective bargaining agreement, town bylaw, city ordinance, or policy may also be excludable from the regular rate. However, sign-on bonuses with a clawback provision pursuant to a collective bargaining agreement, town bylaw, city ordinance or policy would be included in the regular rate.

The Final Rule also clarifies that employers do not need a prior contract or agreement with their employees to exclude certain overtime premiums paid for hours worked by an employee beyond their regular workday or workweek and/or for work on Saturdays, Sundays, holidays, or regular days of rest or the sixth or seventh day of the workweek, where such premiums are at least one and one-half times the established rate of pay for like work performed in non-overtime hours on other days.

Substantive Changes to Call-Back Pay Regulations

In addition, the Final Rule changes the current regulations by eliminating the restriction in Sections 778.221 and 778.222 that “call-back” pay and other similar payments need to be “infrequent and sporadic” in order to be excluded from the regular rate. The Final Rule also makes clear that call-back or other similar payments may not be prearranged. Otherwise, such prearranged payments would constitute compensation for work that was anticipated, which are not excludable from the regular rate. According to the Final Rule, “[t]he key ‘prearrangement’ inquiry is whether the work was anticipated and therefore reasonably could have been scheduled.”

With the clarifications and changes set forth in this Final Rule as well as the updates to the white-collar exemption regulations dealing with those employees who may be exempt from the FLSA’s minimum wage and overtime requirements, as noted in this previous e-blast, which take effect January 1, 2020, employers are well-advised to review their current policies and practices to ensure that they will be in compliance with the FLSA and its regulations when these changes take effect in January.

If you have any questions about the Final Rule regarding the regular rate or the changes to the white-collar regulations, please feel free to contact a member of our Labor, Employment, and Employee Benefits Group.


About Corey Higgins

Corey is an member of the firm's Labor, Employment and Employee Benefits Group. He represents both private- and public-sector employers. His practice covers all areas of labor and employment law, including unfair labor practices, labor arbitration, employment discrimination, non-competition and non-disclosure agreements, unemployment appeals and various other employment-related issues. Corey also routinely counsels employers about the application of various Massachusetts and federal employment laws, including the Family and Medical Leave Act (FMLA), the Fair Labor Standards Act (FLSA), the Worker Adjustment and Retraining Notification Act (WARN), the Massachusetts Plant Closing Law, the Massachusetts Independent Contractor law, and other Massachusetts wage and hour laws.
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