The federal Fair Labor Standards Act requires that employees receive overtime calculated at one-and-a-half times the regular rate of pay for hours over 40 in a workweek unless the employees are exempt from overtime. 

A new rule that went into effect Jan. 15, 2020 makes it easier to determine the regular rate of pay, and thus the overtime due a non-exempt employee who works more than 40 hours in a workweek.

(If you have non-exempt employees earning less than $684 per week, read why you probably need to make some changes to your payroll.)

First, what is the regular rate of pay and why does it matter? 

Suppose a company hires an employee to sell widgets. The employee is to be paid $12 per hour. If this is the only compensation the employee will receive, then $12 per hour is the regular rate of pay, and any overtime must be paid at $18 per hour.

The new rule makes it easier to determine the regular rate of pay, and thus the overtime due a non-exempt employee.

But what if the company promises the employee a $500 bonus if they sell 1,000 widgets in a month?

That is referred to as a non-discretionary bonus, and that bonus must be included in determining the regular rate.

The $500 bonus is divided out among all the hours the employee worked that month and added to the employee's hourly rate.

If the employee worked 200 hours that month, then the employee's regular rate is actually $14.50, not $12, during that month.

This matters because the employee in this example also worked overtime. Any overtime due must be paid at $21.75 per hour, not the $18 per hour rate that did not include any bonus compensation.

Other Payments

What other payments need to be included in the regular rate?

Some payments employers make to employees are required to be apportioned out over the hours worked and included in the regular rate, as in the example above.

But other payments are excludable from the regular rate.

Examples of excludable payments include health insurance payments and discretionary bonuses.

Examples of excludable payments include health insurance payments and discretionary bonuses.

(A discretionary bonus is awarded at the employer's sole discretion, such as a holiday bonus that could be given in any amount or not at all.)

Now, we come to the U.S. Department of Labor's final rule.

Excludable Payments

The final rule clarifies that the following payments are excludable from the regular rate of pay:

  • 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
  • Contributions to benefit plans for accident, unemployment, legal services, or other events that could cause future financial hardship or expense.

The final rule also clarifies that call-back pay is excludable in certain circumstances when such payments are not prearranged.

Bonuses

It is important to carefully assess whether a payment is or is not to be included in the regular rate and not to assume that a generous employer is necessarily complying with the law. 

An employer who gives a guaranteed year-end bonus violates the law if it fails to include the bonus when determining the regular rate. 

By contrast, an employer who never gives a bonus, would not run afoul of that particular provision of the law. 

Wage-and-hour law is one area of law where, unfortunately, generosity can backfire if the proper legal analysis is not performed.


About the author: Rebecca Goldberg is an associate with the Milford office of law firm Berchem Moses PC.