Posted: May 17, 2019
In an effort to have overtime compensation reflect current employment relations, the Department of Labor “DOL” issued a proposed rule on March 29, 2019, addressing the regular rate of pay. The proposed rule is the largest alteration to calculating the regular rate of pay since the 1960s and grants clarity to employers so they can confidently offer non-traditional benefits to employees.
Overtime rules under the Fair Labor Standards Act (FLSA) require employers to pay non-exempt employees one-and-one half times their regular rate of pay for hours worked over 40 in a workweek. Under the FLSA, the regular rate of pay includes all remuneration for employment unless excluded by the act or regulations. The proposed rule’s largest impact is that it will expand the types of remuneration excluded from the regular rate of pay. Under the rule, remuneration that does not have a connection to the quantity or quality of work performed will generally be excluded.
Pay for Forgoing Holidays or Leave
The DOL acknowledged that most employers no longer offer separate sick and vacation leave, but a single type of leave—paid time off. The DOL proposed regulation abolishes the distinction between payment in lieu of sick leave and payment in lieu of vacation or holiday leave, creating a single inquiry for when payment for forgoing use of leave is excludable from the regular rate. The inquiry of the proposed rule is “whether the amount paid is approximately equivalent to the employee’s normal earnings for a similar period of time, and whether the payment is in addition to the employee’s normal compensation for hours worked.” If the payment for forgoing the use of leave meets these two factors, it is excludable from the regular rate of pay for calculating overtime. Additionally, the proposed regulation states that the payments for forgoing the use of the leave are excludable from the regular rate regardless of whether they are paid during the same pay period or during a subsequent pay period.
Compensation for Bona Fide Meal Periods
Bona fide meal periods are not “hours worked” for FLSA’s minimum wage or overtime requirements, and employers are not required to pay for such time. The DOL proposed rule states that an employer offering a paid meal period does not convert the period to “hours worked” for computing regular rate of pay. However, if the employer has agreed or through course of conduct treated a paid lunch period as hours worked, it is not excludable from regular rate.
The DOL’s proposed regulation clarifies when reimbursable expenses are excluded from the regular rate of pay. The proposed regulation eliminates the existing requirement that an excluded reimbursable expense could only be for an expense that solely benefited the employer. The proposed rule states that to have a reimbursement be excluded from the regular rate, the expense need only benefit the employer. For example, an employer under the rule could reimburse an employee for a hotel room to go to a conference for work and exclude the reimbursement from the regular rate of pay. Under current rules, it is uncertain because the expense of paying for the hotel room does not solely benefit the employer.
Other Similar Payments
Like payments for forgoing leave, compensation for bona fide meal periods, and reimbursable payments, the exclusion of “other similar payments” from the regular rate of pay is designed to govern benefits given by employers that do not have a connection to the quantity or quality of work produced. With employers offering novel benefits such as gym membership, mental health programing, student loan repayment, and tuition reimbursement, the DOL is also clarifying that such benefits are excluded from the regular rate of pay if they are not linked to hours or quality of work performed.
Discretionary Bonuses and Call Back Pay
Like compensation for bona fide meal periods, the proposed rule treats discretionary bonuses and call back pay as excludable from the regular rate if they are not so regular as to be expected by employees. Like other forms of remuneration excluded from the regular rate of pay, discretionary bonuses and call back pay are not contingent on hours worked. The DOL proposed rule holds that discretionary bonuses are excludable if “both the fact that bonuses are to be paid and the amounts are determined at the sole discretion of the employer . . . and are not paid pursuant to any prior contract, agreement or promise causing the employees to expect such payments regularly.” Similarly, call back pay is not excludable from the regular rate of pay if it is so regular that it is part of the employee’s schedule.
The DOL’s proposed rule on regular rate of pay for overtime compensation will benefit both employers and employees because clarifying what types of benefits are excluded from the regular rate of pay may encourage employers to offer employees more non-traditional employment benefits. With a few significant exceptions, the proposed rule asserts that employer benefits that do not have a connection between the quality or quantity of worked performed are excluded from calculating the regular rate of pay. However, given the complexity of the FLSA it is advised employers consult a labor and employment attorney before determining what benefits may be excluded from the regular rate of pay. Practitioners should be aware that the DOL’s proposed rule is not yet in effect, and that the public will have 60 days to comment on the proposed rule. The DOL may alter the proposed rule after considering the public comments.
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