On December 16, 2019, the U.S. Department of Labor (“DOL”) published its Final Rule concerning regular rate of pay requirements under the Fair Labor Standards Act (“FLSA”). The Final Rule clarifies that certain employee benefits, perks and bonus payments need not be included in an employee’s regular rate of pay. Because the regular rate of pay is the starting point for determining an employee’s overtime rate, the Final Rule should help employers accurately calculate overtime due, which should also help minimize the risk of wage and hour lawsuits that have the potential for high damages equal to double or even triple unpaid wages plus attorneys’ fees.
As background, the FLSA is the Federal law that requires non-exempt employees to be paid at a premium overtime rate for all hours worked over forty (40) in a week. The overtime rate paid to an employee is based on his or her regular rate of pay. Specifically, the FLSA establishes that the premium overtime rate must be at least one and a half times the regular rate of pay. In other words, for every hour over 40 that a non-exempt employee works during a week, he or she must be paid at least 1.5 times his regular rate of pay. Sounds simple, right?
The problem is that it is not always easy to determine an employee’s regular rate of pay because it is not the same as an employee’s hourly rate of pay. The regular rate of pay includes many benefits employers might provide their workers above and beyond their salary or hourly wage. The FLSA defines the regular rate of pay very broadly to include “all remuneration for employment paid to, or on behalf of, the employee” with very limited exceptions. As a result, the value of things like sign-on bonuses, gym memberships, reimbursement for cell phones, or payouts for unused sick time arguably had to be included in calculating an employee’s regular rate of pay before the new Final Rule. Yet many employers failed to add these benefits to the regular rate, and based overtime only on an employees’s hourly pay rate. As a result, employees end up being underpaid overtime, creating significant legal exposure for wage and hour claims.
The FLSA’s new Final Rule seeks to mitigate such confusion and the related legal exposure by helping employers understand what can be properly excluded from employee’s regular rate of pay. According to the DOL’s Press Release, Fact Sheet, and FAQ’s, the Final Rule clarifies that employers may EXCLUDE from an employee’s regular rate of pay the following benefits:
· 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 for such things as cellphone plans, credentialing exam fees, organization membership dues, and travel, even if not incurred “solely” for the employer’s benefit, and 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;
· Cost of office coffee and snacks to employees as gifts; and
· Contributions to benefit plans for accident, unemployment, legal services, or other events that could cause future financial hardship or expense.
The Final Rule retains the prior standard that discretionary bonuses are properly excluded from the regular rate of pay. But it now clarifies that merely calling a bonus “discretionary” does not determine whether it is actually discretionary and therefore excludable. Instead, the new Final Rule adopts a fact-based approach and provides examples of what constitutes the type of discretionary bonus that is properly excluded from an employee’s regular rate of pay. Importantly, the Final Rule does NOT change that non-discretionary bonuses or commission pay determined in advance and based on a formula set forth in an agreement, offer letter or based on an oral prior promise MUST BE INCLUDED in the regular rate of pay. Only genuine, bona fide non-discretionary bonuses as explained in the Final Rule are properly excluded from the regular rate of pay.
The Final Rule also eliminates a restriction that “call-back” pay and similar type payments must be infrequent and sporadic in order to be excluded from the regular rate of pay. The Final Rule retains the prior standard that such call-back pay must not be prearranged in order to be properly excluded.
Lastly, the DOL’s Final Rule updates the rules concerning the “basic rate of pay” as an alternative to the regular rate. Under the existing regulations, employers using an authorized “basic rate of pay” as an alternative to the regular rate may exclude from an overtime calculation any additional payment that would not increase the total overtime compensation by more than $0.50 a week on average for overtime workweeks in the period for which the employer makes the payment. The Final Rule changes the standard to allow employers using the “basic rate of pay” alternative to exclude from overtime additional payment that would not increase the total overtime compensation by more 40% of the higher 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, which can be found here, becomes effective January 15, 2020.
So where does that leave employers? While the DOL’s Final Rule certainly makes clearer the types of payments excludable from an employee’s regular rate of pay, it does not address every possible fringe benefit an employer might decide to give its employees. The Final Rule also creates a fact-specific approach to figuring out whether a bonus is truly discretionary. As a result, whether a particular bonus is properly excluded from the regular rate of pay must be assessed on a case-by-case basis. This means there still remains ambiguity whether certain types of extra pay are properly excluded from the regular rate even with the new, more specific Final Rule, and the related risk of an unpaid overtime lawsuit. The Final Rule also obviously does not affect state or local law which may have more stringent standards than the FLSA. Employee payments not included in the regular rate under the FLSA may need to be added to the regular rate in order to comply with these state laws. Employers are therefore well-advised to know and understand the wage and hour rules applicable to their business, and seek legal counsel as appropriate, to make sure they are paying their employees all overtime due and hopefully avoiding costly wage and hour litigation.