The DOL Releases Final Rule Updating What Employer-Provided Perks and Benefits Are Excluded From an Employee's Regular Rate of Pay When Calculating Overtime Compensation.

For the first time in more than 50 years, the Department of Labor (DOL) has announced a final rule substantively revising its regulations governing what perks and benefits must be included in the regular rate of pay when calculating an employee’s overtime compensation.

The Fair Labor Standards Act (FLSA) generally requires that 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 FLSA defines the regular rate as “all remuneration for employment paid to, or on behalf of, the employee’’ – subject to certain exclusions. The DOL’s regulations define what forms of payment employers must include in the time-and-one-half calculation when determining workers’ overtime rates. Scheduled to take effect Jan. 15, 2020, the final rule clarifies that certain kinds of perks, benefits and other miscellaneous payments to employees may be excluded from an employee’s regular rate of pay.

The Final Rule Is Designed to ‘Better Reflect the 21st-Century Workplace.’

When the DOL last substantively revised its regular rate regulations in 1968, employees were primarily compensated with traditional wages, paid time off, and contributions to basic medical, life insurance and disability benefit plans. Since then, employee compensation packages have expanded significantly, with many employers now offering their employees additional perks and benefits that were not offered at the time the current regulations were last revised. Because the regulations have not been revised to keep up with the ever-changing workplace, employers often faced a lot of uncertainty and, at times, costly litigation, over whether or not these benefits were required to be included in an employee’s regular rate of pay.

Worried that employers were being dissuaded from providing employees with certain benefits that otherwise would have a positive impact on workplace morale, employee health, employee compensation and employee retention, the DOL issued its notice of proposed rulemaking in March 2019 seeking to provide employers with clarity and appropriate, updated guidance on its regular rate regulations.

The final rule does not impose any additional regulatory requirements or obligations on employers. Instead, the final rule clarifies and confirms that employers may offer the following non-exhaustive list of perks and benefits to employees without risk of additional overtime liability:

  • Payments for unused paid leave, including paid sick leave, holiday pay and paid time off.
  • Premium pay imposed as a penalty on an employer under applicable state and local scheduling laws.
  • Premium pay for hours worked in excess of eight per day or some other applicable maximum hours standard pursuant to a written or unwritten employment contract, agreement, understanding, handbook policy or practice.
  • Premium pay for hours in excess of an employee’s normal or regular hours of work as reflected in an agreement or established practice.
  • Pay for time that would not otherwise qualify as “hours worked,” including bona fide meal periods and non-compensable preliminary and postliminary activity (unless the parties treat such time as hours worked).
  • “Callback” pay and other similar payments when an employee responds to a call from the employer to perform extra work, as long as the payments are not prearranged.
  • Wellness programs such as biometric screenings, vaccination clinics, nutrition classes, weight loss programs, nutrition classes, on-site specialist treatment and mental health wellness programs.
  • Reimbursed expenses, including cellphone plans, credentialing exam fees, organization membership dues and travel, even if not incurred “solely” for the employer’s benefit, as long as the expenses are incurred on or for the employer’s behalf, convenience or benefit.
  • Employer contributions to benefit plans for accident, unemployment, legal services or other events that could cause future financial hardship or expense.
  • Financial wellness programs or counseling.
  • Gym access and memberships, fitness classes, and recreational facilities.
  • Discounts on retail goods and services.
  • Certain tuition benefits, reimbursement plans or student loan forgiveness programs, as long as the programs are available to employees regardless of their hours worked or services rendered.
  • Parking spaces and parking benefits.
  • Restrooms and locker facilities.
  • Office coffee and snacks.
  • Adoption assistance (including financial assistance, legal services or information and referral services).

The final rule also updates the regulations pertaining to the “basic rate,” which is authorized under Section 7(g)(3) of the FLSA as an alternative to the regular rate under specific circumstances, to authorize employers to exclude from the overtime computation any additional payment that would not increase total overtime compensation by more than 40 percent of the higher of the applicable local, state or federal minimum weekly wage on average for the overtime workweeks in which the employer makes the payment.

The Final Rule Provides Further Clarification on What Types of Bonuses Are Considered ‘Discretionary.’

Section 7(e)(3)(A) of the FLSA excludes discretionary bonuses from an employee’s regular rate. The final rule revises the regulations implementing this exclusion to clarify that neither the label assigned to a bonus payment nor the reason the bonus was paid conclusively establish whether the bonus is considered “discretionary.” The final rule revises the regulations and adds in a new provision specifically clarifying that the terms of the FLSA and the facts specific to the bonus at issue determine whether the bonus is discretionary. Instead, as the final rule explains, bonuses are discretionary if the bonuses are to be paid and the amounts are determined at the sole discretion of the employer at or near the end of the periods to which the bonuses correspond, and they are not paid pursuant to any prior contract, agreement or promise causing the employee to expect such payments.

The final rule also provides examples of bonuses that are typically discretionary and, alternatively, those that are typically nondiscretionary. Specifically, the final rule lists sign-on bonuses with clawback provisions, longevity or retention bonuses, and most attendance and production bonuses related to quality and accuracy of work as types of bonuses that are typically nondiscretionary and, in most situations, would be included in the regular rate calculation. Conversely, sign-on bonuses with no clawback provision, bonuses recognizing an employee’s special or extraordinary efforts that are not awarded according to preestablished criteria, referral bonuses for employees other than recruiting personnel, severance bonuses, bonuses for overcoming challenging or stressful circumstances, and employee-of-the-month bonuses are identified as the types of bonuses that are typically considered discretionary because they are usually not promised in advance and are typically for amounts determined at the sole discretion of the employer.

Employers Are Encouraged to Provide Additional and Innovative Benefits to Workers Without Incurring Additional Overtime Liability.

The final rule is a positive change for employers that are considering expanding their employee compensation packages or are hoping to provide employees with unique perks and benefits that they may not otherwise have provided due to apprehension about the potential overtime consequences and threats of litigation. In addition to providing employers with greater flexibility and incentivizing and fostering more creativity and innovation with respect to employee benefits and compensation packages, the DOL anticipates that the final rule will eliminate avoidable litigation.

Although the final rule provides much-needed clarification on the categories of pay and benefits that may be excluded from the regular rate, employers still should consult with counsel on the possible ramifications before implementing any new compensation scheme or providing employees with new perks and benefits. Employers also must not forget to review all applicable state wage laws to ensure any new employee pay and benefits do not run afoul of any state wage or overtime laws.

If you have any questions about the FLSA, if a specific employee perk or benefit would be included in the regular rate for overtime compensation, or other related guidance, please contact the author or any member of BakerHostetler’s Labor and Employment Group.

Authorship Credit: Ashlee Grant and David Grant