Labor & Employment Law Daily DOL issues final rule defining payments employers must include and exclude in determining regular rate for overtime
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Monday, December 16, 2019

DOL issues final rule defining payments employers must include and exclude in determining regular rate for overtime

By Ronald Miller, J.D.

On December 12, 2019, the U.S. Department of Labor announced a final rule that would revise the regulations for Part 778 of CFR title 29 to provide clarification as to which perks and benefits must be included in the regular rate of pay.

The FLSA generally requires that covered, nonexempt employees receive overtime pay of at least one and one-half times their regular rate of pay for time worked in excess of 40 hours per workweek. The regular rate includes all remuneration for employment, subject to the exclusions outlined in section 7(e) of the FLSA. In this final rule, the Department of Labor updates a number of regulations on the calculation of overtime compensation both to provide clarity and to better reflect the 21st-century workplace.

Modern workplace. The DOL touts that the final rule will allow employers to more easily offer perks and benefits to their employees. Part 778 of CFR title 29 contains the regulations addressing the calculation of the regular rate of pay for overtime compensation under section 7 of the FLSA. When this regulation was promulgated more than 60 years ago, the typical compensation consisted predominantly of traditional wages, paid time off for holidays and vacations, and contributions to basic medical, life insurance, and disability benefits plans.

Today, employee compensation packages, including employer-provided benefits and “perks” have expanded significantly. The Bureau of Labor Statistics (BLS) estimated that while fringe benefits comprised only five percent of employees’ total compensation in 1950, such benefits make up approximately one-third of total compensation today, including wellness benefits, vaccination clinics, gym access and fitness classes, employee discounts on retail goods and services, and tuition payments.

The Department published a notice of proposed rulemaking (NPRM) in the Federal Register on March 29, 2019, about proposed updates to regulations in Part 778 to reflect changes in the modern workplace and to provide clarifications that reflect the statutory language and the Wage and Hour Division’s enforcement practices. Additionally, the Department proposed minor clarifications and updates to part 548 of title 29, which implements section 7(g)(3) of the FLSA. Section 7(g)(3) permits employers, under specific circumstances, to use a basic rate to compute overtime compensation rather than a regular rate.

After considering comments, the DOL has decided to adopt the NPRM’s proposed changes with some modifications. The final rule clarifies when payments for forgoing unused paid leave, payments for bona fide meal periods, reimbursements, benefit plan contributions, and certain ancillary benefits may be excluded from the regular rate. The final rule also revises certain sections of the existing regulation to more closely align with the Act. Additionally, the final rule incorporates, with modification, the proposed clarifications and updates to part 548.

Regular rate. The FLSA’s definition of “regular rate” and the eight categories of excludable payments are contained in Section 7(e) of the Act. The Department’s regulations concerning the regular rate requirements are contained in 29 CFR part 778. While Section 7(a) defines the general overtime entitlement in terms of an employee’s regular rate, under certain circumstances, the FLSA permits employers to use a “basic rate,” rather than the regular rate as defined in section 7(e), to calculate overtime compensation. The requirements an employer must meet to use a basic rate are set forth in Section 7(g).

Excludable compensation. The DOL finalized its proposals to update the regulations in parts 778 and 548 to clarify the Department’s interpretation in light of modern compensation and benefits practices. Many of the Department’s regulatory updates in this final rule clarify the type of compensation that is excludable from the regular rate under FLSA section 7(e)(2). Section 7(e)(2) permits an employer to exclude from the regular rate three distinct categories of payment: first, “payments made for occasional periods when no work is performed due to vacation, holiday, illness, failure of the employer to provide sufficient work, or other similar cause”; second, “reasonable payments for traveling expenses, or other expenses, incurred by an employee in the furtherance of his employer’s interests and properly reimbursable by the employer”; and third, “other similar payments to an employee which are not made as compensation for his hours of employment.”

Specifically, the final rule clarifies that employers may offer the following perks and benefits to employees without risk of additional overtime liability:

  • 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 for unused paid leave, including paid sick leave or paid time off;
  • 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; and clarifies that reimbursements that do not exceed the maximum travel reimbursement under the Federal Travel Regulation System or the optional IRS substantiation amounts for travel expenses are per se “reasonable payments”;
  • certain sign-on bonuses and certain longevity bonuses;
  • the cost of office coffee and snacks to employees as gifts;
  • discretionary bonuses, by clarifying that the label given a bonus does not determine whether it is discretionary and providing additional examples; and
  • contributions to benefit plans for accident, unemployment, legal services, or other events that could cause future financial hardship or expense.

According to the DOL, these changes will promote compliance with the FLSA, provide appropriate and updated guidance in an area of evolving law and practice, and encourage employers to provide additional and innovative benefits to workers without fear of costly litigation.

The Final Rule was published December 16, 2019, in the Federal Register, with an effective date of January 15, 2020. A Fact Sheet about the final rule is also available.

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