With a stated aim of providing clarification on how to determine employees’ regular rate of pay, the U.S. Department of Labor (DOL) has announced a new proposed rule updating what forms of payment employers can include and exclude in the “time and one-half” overtime pay calculation.
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That clarification is needed, according to attorneys who work with employers on compensation matters.
The Fair Labor Standards Act (FLSA) requires that nonexempt employees—those who are eligible for overtime pay—be paid 1½ times their “regular rate of pay” for all hours worked over 40 in a workweek.
Juanita Beecher, an attorney with Fortney & Scott, LLC in Washington, D.C., says employer confusion on how to calculate an employee’s regular rate of pay stems from language in the FLSA that says overtime is based on an employee’s regular rate, which is defined as “all remuneration for employment paid to, or on behalf of, the employee,” minus such things as vacation, holiday, or sick pay.
“With the many additional benefits now paid to employees, it is not clear from this language that items such as gym memberships, payout of unused vacation, or employee discounts may not have to go into the regular rate,” Beecher says, adding that the rule has not been revised in 50 years.
Martin J. Regimbal, an attorney with The Kullman Firm in Columbus, Mississippi, agrees clarification is needed. “While the concept of including all remuneration received in the regular rate calculation is simple on its face, actually determining which types of remuneration and/or benefits must be included is not always so simple,” he says.
In many circumstances, “all remuneration” includes more than an employee’s hourly rate. For example, nondiscretionary bonuses must be included in an employee’s regular rate of pay. But bonuses paid completely within the employer’s discretion close to the end of the period for which the bonus is paid and not required by any agreement don’t have to be included in determining an employee’s regular rate of pay.
Regimbal says that “as employers have continued to devise new pay schemes and to come up with additional benefits packages to attract and retain a talented workforce, the current regulations have not kept pace and do not provide enough guidance for employers to be certain of which forms of pay/benefits must be included in the regular rate.”
Employers have been calling for clarification, Regimbal says. “The lack of clarity has kept many employers from providing additional benefits for fear of the uncertain consequences under the regular rate calculation,” he says.
Beecher adds that “employers don’t like guessing what they should be including because, if they are wrong, they will owe back pay and potentially liquidated damages,” she says.
What Could Be Excluded From Regular Rate of Pay
The DOL’s announcement says the new proposed rule would clarify that employers would be allowed to exclude the following items from an employee’s regular rate of pay:
- The cost of providing wellness programs, onsite specialist treatment, gym access, and fitness classes, and employee discounts on retail goods and services;
- Payments for unused paid leave, including paid sick leave;
- Reimbursed expenses, even if not incurred “solely” for the employer’s benefit;
- Reimbursed travel expenses that don’t exceed the maximum travel reimbursement under the Federal Travel Regulation System and that satisfy other regulatory requirements;
- Discretionary bonuses, by providing additional examples and clarifying that the label given a bonus does not determine whether it is discretionary;
- Benefit plans, including accident, unemployment, and legal services; and
- Tuition programs, such as reimbursement programs or repayment of educational debt.
How to Submit Comments
Interested parties are invited to submit comments about the proposed rule electronically at www.regulations.gov, in the rulemaking docket RIN 1235-AA24. Comments must be submitted by 11:59 p.m. Eastern time on May 28, 2019, to be considered.
Tammy Binford writes and edits news alerts and newsletter articles on labor and employment law topics for BLR web and print publications.