The U.S. Department of Labor (“DOL”) has issued guidance to employers on what forms of compensation may be excluded from an employee’s regular rate for purposes of overtime calculation.

On December 12, 2019, the DOL announced a Final Rule (“Rule”) clarifying and updating regulations relating to “regular rate” requirements under the Fair Labor Standards Act’s (“FLSA”). The Rule went into effect on January 15, 2020.

This Rule is significant, not only because it is designed to remedy this gap by targeting these unanswered questions, but also because it represents the first substantive update to the regulations in over 50 years.

The DOL, though this Rule, is providing employers with much needed direction as to what types of compensation should be included when determining an employee’s “regular rate” for overtime calculations and pay; and also allowing employers to more easily provide its employees with perks and benefits.

Generally, the FLSA requires overtime pay of at least one and one-half times the regular rate for hours worked in excess of 40 hours in a workweek. A “regular rate” requirement is what defines the forms of payment employers include in the “time and one-half” calculation when calculating overtime rates.

Most forms of monetary compensation count toward the employee’s regular rate of pay. Prior to the enactment of this Rule, employers were left with questions regarding how certain perks and benefits factored into the regular rate of pay calculations. Indeed, the prior regulations did not address whether employers should count certain employee perks and benefits (fitness programs, employee reimbursements, wellness programs, etc.).

The DOL’s updated rule confirms that employer may exclude the following forms of compensation from an employee’s regular rate of pay:

  • 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;
  • Payments for unused paid leave;
  • Payments of certain penalties required under state and local scheduling laws;
  • Reimbursed expenses, even if not incurred “solely” for the employer’s benefit;
  • Certain sign-on bonuses and longevity bonuses;
  • Cost of office coffee and snacks to employees as gifts;
  • Discretionary bonuses; and
  • Contributions to certain benefit plans.

As to bonuses, the Rule makes it crystal clear that labeling a bonus as discretionary is not enough to be excludable. Bonuses are discretionary and excludable from the regular rate under the Rule only if: (a) the fact that the bonus will be paid and the amount of the payment are determined at the sole discretion of the employer at or near the end of the period to which the bonus corresponds; and (b) the bonus is not paid because of a prior contract, agreement, or promise causing the employee to expect the payment.

Moreover, the Rule also changes its treatment of “call-back” pay. Call-back pay is additional compensation for calling an employee back to work without prearrangement to perform extra work after the employee’s scheduled shift ended. Under the prior construct, an employer could only exclude call-back pay if it was “infrequent and sporadic.” That is no longer the case. The Rule has eliminated the requirement that “call-back” pay be “infrequent and sporadic” to be excluded from the employee’s regular rate.

Employers should examine its workforce with care and pay close attention to the forms of compensation that may be excluded from an employee’s regular rate when drafting compensation plans and providing employee benefit plans. The Rule helps employers by providing much wanted certainty about whether certain perks and benefits are excludable, allowing employers to make informed decisions about the perks and benefits they will provide.

That said, state wage and hour laws will continue to factor in the analysis and decisions related to overtime pay, and employers should ensure that they continue to make base pay calculation decisions on a careful analysis of both state and federal laws.

Michelle De Oliveira is a litigator at Kenney & Sams. She represents clients in employment-related matters.