The federal Department of Labor has issued a final rule on regular rate of pay requirements, clarifying the types of payments and benefits employers may exclude when determining a worker's regular rate of pay.
The regular rate is the basis for the time and one-half calculation when determining a worker’s applicable overtime rate.
The Fair Labor Standards Act requires that non-exempt employees be paid at least 1.5 times their regular rate of pay for all hours worked over 40 in a workweek.
This is the first major change to regulations governing regular rate of pay requirements under the FLSA in over 50 years.
The regular rate includes a worker's hourly pay rate plus "all remuneration for employment" unless specifically excluded by the FLSA.
Examples of pay that must be included in a worker's regular rate when calculating overtime include non-discretionary bonuses, commissions, and shift differentials.
Types of compensation already excluded from the regular rate calculation include vacation and holiday pay, health insurance, employer contributions to retirement benefits, and reimbursements for business expenses.
The final rule takes effect Jan. 15, 2020.
The change should resolve issues raised in lawsuits filed in recent years that claimed employers should pay overtime on the value of certain perks they provide to employees.
It now allows employers to provide certain benefits to their workers without worrying about paying overtime on the value of those benefits, or risking litigation.
Under the final rule, benefits and payments that can be excluded from overtime calculation include:
- The cost of parking benefits, wellness programs, gym access and fitness classes, discounts on retail goods and services, certain tuition benefits, and adoption assistance
- Payments for unused paid leave, including sick time or paid time off
- Reimbursed expenses, including cell phone plans, credentialing exam fees, membership dues, and travel
- Certain sign-on and longevity bonuses
- The cost of office coffee and snacks given to employees
- Discretionary bonuses
- Contributions to benefits plans for accident, unemployment, legal services, or other events that could cause future financial hardship
To constitute an excludable discretionary bonus, a payment cannot be announced in advance to the employee, and the amount must not be based on any standard metrics such as hours worked, performance, revenue, or profit.
This clarifying rule comes just a few months after the U.S. Department of Labor issued a final rule revising the minimum salary threshold for overtime eligibility under the FLSA, taking effect January 1, 2020.
Both of these changes highlight the need for employers to audit their payroll practices and how they treat various benefits regarding overtime calculations, as well as their exempt/nonexempt classifications.
Employers should also consult with an attorney to verify that their practices are also in compliance with applicable state laws, which may differ from FLSA standards.
CBIA's March 26 2020 HR Conference includes an FLSA update session covering these and other wage and hour issues.