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DOL finalizes regular rate of pay rule for overtime purposes

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By Stephen Douglas , Rich Gisonny , Laura Rickey and Lindsay Wiggins | January 7, 2020

The final rules clarify which perks, benefits and other miscellaneous items must be included in the regular rate of pay, effective January 15, 2020.

The Department of Labor (DOL) has issued final rules that update the definition of “regular rate” of pay for purposes of calculating overtime under the federal Fair Labor Standards Act (FLSA). The final rules clarify which perks, benefits and other miscellaneous items must be included in the regular rate. 

The updated rules were issued to reflect the evolution of employee compensation packages in the 21st-century workplace. The DOL published a Fact Sheet and highlights regarding the rules, which take effect January 15, 2020.

General discussion and observations

Under the FLSA, employers generally must pay covered nonexempt employees at least 1.5 times their regular rate of pay for hours worked in excess of 40 per week. An employee’s regular rate includes all remuneration for employment, subject to certain exclusions. The final rules clarify that the following payments are among the type that may be excluded: 

  • The cost of providing certain parking benefits, wellness programs, onsite specialist treatment, gym access and fitness classes (whether onsite or offsite), employee discounts on retail goods and services, employee assistance programs and adoption assistance
  • Payments for unused paid leave, including paid sick leave or paid time off 
  • Reimbursed cell phone expenses, credentialing exam fees, organization membership dues and travel expenses that reasonably approximate the expense incurred
  • “Sign on” bonuses with no clawback provision, as well as longevity payments when received as a reward for tenure and not, for example, as part of a collective bargaining agreement
  • Pay for time that would not otherwise qualify as “hours worked,” including bona fide meal periods unless the parties have treated the time as hours worked
  • Tuition programs, such as reimbursement programs or repayment of educational debt, regardless of whether the payment is made to an employee, an education provider or a student loan program 
  • Certain overtime premiums, regardless of whether a prior formal contract or agreement exists 

The DOL also includes examples of “discretionary bonuses” that may be excluded from the regular rate and clarifies that a bonus’s label does not determine whether it is discretionary. Such bonuses might include those awarded for unique or extraordinary efforts outside of established criteria, severance bonuses, bonuses for overcoming challenging or stressful situations, referral bonuses and employee-of-the-month bonuses.

In addition, the DOL provides examples of benefit plans, including accident, unemployment and legal services, that may be excluded from the regular rate of pay. The final rules also clarify that while many pension and welfare plan contributions are excludable, there are exceptions that may cause these amounts to be part of employees’ regular rate (e.g., when cash is paid in lieu of plan participation or when a benefit is tied to conditions related to quality or quantity of work performed). 

Finally, the DOL makes two substantive changes to the existing regulations. First, “call-back” pay and other similar payments are no longer required to be “infrequent and sporadic” to be excludable from the regular rate; however, they still may not be so regular that they are essentially prearranged. Second, the department updates its “basic rate” regulations, which under the FLSA are an alternative to the regular rate under specific circumstances. Under current regulations, employers may exclude from the overtime computation any additional payment that would not increase total overtime compensation by more than $0.50 a week on average for overtime weeks during the payment period. The new rules change the $0.50 limit to 40% of the higher of the applicable local, state or federal hourly minimum wage. 

Going forward

Employers will want to review their current practices to determine whether any payroll-related changes are required or advisable after the regulations take effect. When state law differs, the stricter requirement should be applied. 

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