On December 11, 2019, the United States Department of Labor (“DOL”) issued its final rule on “Regular Rates under the Fair Labor Standards Act,” which modifies the agency’s rules on calculating the regular rate of pay as it relates to the inclusion or exclusion of various employer perks and benefits.
The new rule encourages employers to offer perks and benefits to its employees by clarifying any uncertainty regarding the agency’s rules, especially since the agency has not made a “significant update” to its regular rate of pay rules in 50 years. The DOL hopes these updates will encourage employers to offer additional and innovative benefits to its workers without the fear of costly litigation for unpaid overtime.
Calculating Regular Rate of Pay
Under the Fair Labor Standards Act (“FLSA”), non-exempt employees are entitled to one-and-one half times their regular rate of pay for all hours worked over 40 hours in a workweek. The regular rate of pay includes “all remuneration for employment,” except payments specifically excluded by the FLSA, divided by the total hours worked.
The new rule excludes the following benefits from an employee’s regular rate of pay:
- Wellness programs, onsite specialist treatment, gym access, and fitness classes;
- Parking benefits, such as parking spaces; however, commuter subsidies, such as public transportation benefits, are not excludable.
- Emergency childcare services, but not routine childcare services;
- Payments for unused paid leave, including paid sick leave or paid time off;
- Office coffee and snacks to employees;
- Payments to certain penalties required under state and local scheduling laws;
- Reimbursements for cellphone plans, credentialing exam fees, organization membership dues, and travel, even if the travel is not incurred solely for the employer’s benefit;
- Contributions to benefit plans for accident, unemployment, legal services, or other events that could cause future financial hardship or expense;
- Certain tuition benefits;
- Certain sign-on bonuses and certain longevity bonuses;
- Discretionary bonuses; and
- Call-back pay, unless the call-back shifts are anticipated or prearranged.
With respect to tuition benefits, these benefits can be excluded from an employee’s regular rate of pay as long as the tuition benefit program is available to employees regardless of the hours worked or services rendered, are optional, and are directed at particular educational and training opportunities outside the employer’s workplace.
The DOL also clarified that sign-on bonuses are excludable from the regular rate of pay if they are not subject to a clawback provision, or if they have a clawback provision, the clawback provision is not pursuant to a collective bargaining agreement or city ordinance. Likewise, longevity bonuses are excludable as long as the bonus is not directly dependent on hours worked, production or efficiency. However, a longevity bonus based on tenure or length of service is excludable.
Moreover, the DOL provides comprehensive guidance on discretionary bonuses that are excludable from an employee’s regular rate of pay. Specifically, the DOL noted that a bonus is discretionary and therefore excludable, regardless of its designation, if the fact that the bonus is to be paid and the amount determined are at the sole discretion of the employer at or near the end of the period to which the bonus corresponds and the bonus is not paid pursuant to any prior contract, agreement or promise.
The new rule becomes effective on January 15, 2020.
Takeaway for Employers
Employers should review the benefits and perks provided to non-exempt employees and determine whether the rule excludes these benefits and perks from the employee’s regular rate of pay. Additionally, employers should exercise caution in categorizing certain benefits as excludable solely based on its title or label. As discussed above, whether certain benefits, such as discretionary bonuses, should be included in the regular rate requires a fact-specific determination.
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