DOL Rule Clears Up Overtime Math Exclusions for Employers

December 18, 2019Articles Law360

This past spring, the U.S. Department of Labor proposed a rule that would update the regulations governing what forms of compensation are included and excluded from the calculation of overtime under the Fair Labor Standards Act. After analyzing public comments about these proposed regulations, on Dec. 16, the DOL published final regulations updating what forms of remuneration are used to calculate overtime compensation.[1]

The final regulations are substantially similar to the proposed regulations and will go into effect on Jan. 15, 2020.

Understanding an employee’s regular rate of pay is crucial to accurately calculating overtime rates and thus paying employees correctly. Unless an employee (or the employer) satisfies an overtime exemption, the FLSA requires an employer to pay an employee overtime whenever the employee works more than 40 hours during any given workweek.

Under the FLSA, overtime is paid at one and one-half times an employee’s regular rate of pay. However, the regular rate of pay is a term of art under the FLSA. Many employers believe that an individual’s overtime rate is calculated simply by multiplying the employee’s hourly wage rate by 1.5. This is incorrect.

The overtime calculation is far more detailed and complex. It includes all remuneration for employment paid to an employee by the employer, less payments falling into eight specific exceptions, known as the statutory exceptions, divided by the hours worked during the workweek in question for which such remuneration was paid. The statutory exceptions are:

  • Sums paid as gifts or payments in the nature of gifts at holiday time or on other special occasions. The amounts of which are not measured by or dependent upon hours worked, production or efficiency;
  • Payments made for occasional periods when no work is performed due to vacation, holidays, illness, failure of the employer to provide sufficient work, or other similar cause; reasonable payments for traveling expenses or other expenses incurred by the employee in furtherance of the employer’s interests for which the employee is reimbursed; and other similar payments to an employee which are not made as compensation for hours of employment;
  • Payments paid in recognition of services performed provided the fact of the payment and amount of the payment are at the sole discretion of the employer and not pursuant to any prior contract, agreement or promise;
  • Contributions irrevocably made by an employer to a trustee or third person pursuant to a bona fide plan for providing old-age, retirement, life, accident or health insurance, or similar benefits;
  • Extra compensation provided by a premium rate paid for certain hours worked by the employee because such hours are in excess of eight in a day or 40 in a week, or in excess of the employee’s normal working hours or regular working hours as the case may be;
  • Extra compensation provided by a premium rate for working on weekends, holidays, regular days of rest, or the sixth or seventh day of the workweek provided such premium rate is not less than one and one-half times the rate established in good faith for like work performed in nonovertime hours on other days;
  • Extra compensation paid to an employee pursuant to an applicable employment contract or collective bargaining agreement for work outside of the hours established by such contract or agreement, provided such extra compensation is paid at a rate not less than one and one-half times the rate established in good faith for like work performed during such workday or workweek; or
  • Any value or income derived from employer-provided grants or rights pursuant to a stock option, stock appreciation right, or bona fide employee stock purchase plan.

Since the regulations regarding the regular rate of pay were promulgated in 1950, there have been a number of perks and other rewards that employers provide to employees and it is unclear whether such perks and rewards are included or excluded from the regular rate of pay. For example, are the cost of gym memberships, fitness classes, wellness programs, management coaching, stress-reduction programs, paid time off, and mandatory sick leave included or excluded from the regular rate of pay? The new regulations address many of these issues.

Specifically, these new DOL regulations confirm that employers may exclude from the employee’s regular rate of pay the following:

  • The cost of providing wellness programs, on-site specialist treatment, gym memberships and fitness classes, and employee discounts on retail goods and services;
  • Payments for unused paid leave, including paid sick leave and paid time off;
  • Reimbursed expenses, even if not incurred solely for the employer’s benefit;
  • Reimbursed travel expenses that do not 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.

The new regulations also include additional clarification about other forms of compensation, including payment for meal periods, call-back pay, show-up pay, predictability pay and other forms of payment that may be required by state or local law or an applicable contract or agreement. 

Excludable Compensation Under FLSA Section 7(e)(2)

Occasional Periods When No Work Is Performed

The DOL has clarified that payment for all forms of accrued, but unused leave, including holiday, vacation and sick leave when the pay is the approximate equivalent of the employee’s normal earnings are excluded from regular rate of pay for overtime purposes. Previously, it was unclear whether a cash-out at year end of an employees’ accrued, but unused, leave time was excluded from the regular rate of pay.

It was also unclear whether payments made pursuant to a paid time off policy, which employees could use for any purpose, were excluded from the regular rate of pay. The new rule clarifies that these and related payments are indeed excluded from the regular rate of pay.

Further, the regulations previously stated that lunch periods when no work was performed are not counted as hours worked and any payment made for such periods does not need to be included in the regular rate of pay. However, there was confusion if the regulation applied to meal periods other than lunch, such as dinner breaks, breakfast breaks and other similar periods.

Accordingly, the DOL regulations now state that, bona fide meal periods (when the employee is relieved of all duties) will not be considered hours worked for purposes of minimum wage or overtime requirements and employers are not required to compensate employees for such time. Further, if an employer pays an employee for such meal periods, the compensation can be excluded from the regular rate.

Similarly, show-up pay, predictability pay and similar types of payments that are required by state or local law or contract, which require an employer to pay an employee a specified amount, but where the employee does not actually perform any work, are excluded from the regular rate. This includes payments when an employer changes an employee’s schedule as required under the laws of various municipalities.

Further, call-back pay premiums/penalties, where an employee receives a payment for being called back to work after the employee’s shift ends, are also excluded from the overtime calculation, unless the call back was prearranged (e.g., the employer knew in advance that it would need to call back an employee).

Reimbursable Expenses

The DOL also clarified what is a reimbursable expense because, as previously written, the regulations required any reimbursable expense that is disproportionately large to be included in the regular rate. To determine what is reasonable and properly reimbursable, the new rule refers to the Federal Travel Regulation. This change makes it clear that if an employee is traveling on behalf of the employer, the expense is per se reasonable if it is at or beneath the maximum reimbursable amount allowed under the Federal Travel Regulation.

Other Similar Payments

Under the law, payments that have no connection to the quantity or quality of an employee’s work are also excludable from the regular rate. As such, the new regulations attempt to clarify that when an employer provides benefits unconnected to the quantity or quality of an employee’s work, such compensation is not included in the regular rate of pay.

A wage supplement, however, even when not directly tied to performance or hours is still compensation for hours of employment. For example, production bonuses, and the cost of furnished board, lodging or facilities, are compensation for services rendered and therefore must be included in the regular rate.

The DOL provides some examples of other similar payments that would, however, be excludable from the regular rate including the cost of personal trainers, chiropractors, physical therapists, gym access, gym membership, fitness classes, wellness programs, employee discounts on retail goods, and tuition reimbursements.

Discretionary Bonuses Under FLSA Section 7(e)(3)

Typically, when an employer retains discretion over the fact and amount of a bonus, the bonus will not be included in the regular rate of pay, but where the bonus is paid pursuant to a prior contract, agreement or promise, it is considered nondiscretionary and included in the regular rate. The DOL has now excluded from the regular rate of pay calculation sign-on bonuses, holiday bonuses and similar types of bonuses unconnected to hours worked or productivity.

Excludable Benefits Under FLSA Section 7(e)(4)

Under the FLSA, contributions to a bona fide plan for old-age, retirement, life, accident or health insurance, or similar benefits are excluded from the regular rate. Currently, the regulation provides that in order to be excluded from the regular rate, the plan’s primary purpose must be to provide benefits to employees on account of "death, disability advanced age, retirement, illness, medical expenses, hospitalization, and the like." The DOL has now added more examples of modern benefit plans that are excludable, including unemployment, legal services and accident plans.

As referenced above, these new regulations go into effect on Jan. 15. Employers should consider reevaluating their overtime practices to ensure their continued compliance with the new regulations.

Reprinted with permission from Law360(c) 2019 Portfolio Media. Further duplication without permission is prohibited. All rights reserved.