The DOL has released a final rule that clarifies the definition of "regular rate of pay" for the purposes of calculating overtime pay. The final rule takes effect on Jan. 15, 2020.
Background:
The federal Fair Labor Standards Act (FLSA) requires employers to pay non-exempt employees 1.5 times their "regular rate of pay" for all hours worked over 40 in a workweek. To determine an employee's regular rate of pay, employers must include "all remuneration for employment paid to, or on behalf of, the employee" except for eight categories specifically excluded. For example an employee's regular rate must include their hourly rate as well as the value of nondiscretionary bonuses and shift differentials.
Final Rule:
In the final rule, the DOL addresses whether several perks and benefits must be included in the regular rate of pay. Specifically, the final rule clarifies that the following may be excluded:
- Certain sign-on bonuses (for details, see the final rule);
- Discretionary bonuses (see below);
- Payments for unused paid leave, including paid sick leave or paid time off;
- The 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 of certain penalties required under state and local scheduling laws;
- Reimbursed expenses, including cellphone plans, credentialing exam fees, organization membership dues, and travel, even if not incurred "solely" for the employer's benefit;
- The cost of office coffee and snacks to employees as gifts;
- Contributions to benefit plans for accident, unemployment, legal services, or other events that could cause future financial hardship or expense.
Discretionary Bonuses
The final rule clarifies what is considered a discretionary bonus and provides additional examples of bonuses that may be discretionary. To be considered discretionary and therefore excluded from an employee's regular rate, a bonus must not be paid pursuant to any prior contract, agreement, or promise. Examples include bonuses to employees who made unique efforts that are not awarded according to preestablished criteria, severance bonuses, referral bonuses, bonuses for overcoming challenging or stressful situations, employee-of-the-month bonuses, and other similar compensation. These bonuses are usually not promised in advance and the amount of payment is in the sole discretion of the employer until at or near the end of the period to which the bonus corresponds.
On the other hand, any bonus that is promised to employees upon hire or that is the result of collective bargaining must be included in the regular rate. Bonuses that are announced to employees to encourage them to work more quickly or efficiently, or to remain with the company must also be included in the regular rate of pay. Most attendance bonuses, individual or group production bonuses, bonuses for quality and accuracy of work, bonuses contingent upon the employee continuing employment until the time the payment is to made must be included in the regular rate of pay.
The final rule makes clear that the label or name assigned to a bonus doesn't determine whether a bonus is discretionary. Bonuses are discretionary and excludable only if both: (1) the fact that the bonuses are to be paid and the amounts are determined at the sole discretion of the employer at or near the end of the periods to which the bonuses correspond; and (2) they are not paid pursuant to any prior contract, agreement, or promise causing the employee to expect such payments regularly.
Other Changes:
The final rule also removes the restriction in §778.221 and § 778.222 that "call back" pay and similar payments must be "infrequent and sporadic" to be excluded from an employee's regular rate. However, such payments must not be prearranged. To determine whether the payments are prearranged, the DOL will look at whether the work was anticipated and therefore reasonably could have been scheduled. Additionally, the final rule updates the requirements for employers using an authorized "basic rate," which is permitted under the FLSA as an alternative to the regular rate under specific circumstances.
Compliance Recommendations:
Employers should review the final rule in full and determine whether any changes should be made to their pay practices as a result. Please contact your dedicated service professional with any questions.