United States: U.S. Department Of Labor Proposes Changes To Nonexempt Overtime Regulations

Last Updated: April 25 2019
Article by Christopher D. Durham and Christopher D. Kanne

On March 29, 2019, the U.S. Department of Labor (DOL) published a notice of proposed rulemaking to update existing regulations regarding what employers must include in a nonexempt employee's "regular rate" of pay for purposes of calculating overtime pay under the Fair Labor Standards Act (FLSA). The DOL's proposed rule attempts to clearly define which perks should and should not be included in employees' "regular rate of pay" when calculating overtime, as employee compensation has changed dramatically since the regulations were last significantly changed more than 60 years ago. If adopted, the amended regulations would clarify what must be included in the regular rate and simplify the calculation of the regular rate by expressly excluding many employment perks from the regular rate of pay.

The Regular Rate

The FLSA requires employers to pay nonexempt employees overtime for all hours worked over 40 in a workweek. Overtime must be paid at a rate of at least one and one-half times the employee's "regular rate" of pay. However, calculating the regular rate often is not as simple as looking to an employee's standard hourly rate of pay. The FLSA defines the regular rate as ''all remuneration for employment paid to, or on behalf of, the employee" subject to eight exclusions. 29 U.S.C. § 207(e). Under DOL regulations, various perks of employment and other forms of compensation (e.g., nondiscretionary bonuses, commissions) need to be included in the employer's calculation of the regular rate for overtime purposes, while certain other perks and forms of compensation (e.g., discretionary bonuses) can be excluded when calculating the regular rate.

Proposed Amendments to Regular Rate Regulations

The primary focus of the proposed rule is to clarify whether certain employment perks and benefits must be included in the regular rate. In this regard, the proposed rule expressly provides that employers may exclude the following when calculating employees' regular rate of pay:

  • The cost of providing wellness programs, on-site specialist treatment, gym access and fitness classes;
  • Payments for unused paid leave, including paid sick leave;
  • Reimbursed expenses, even if not incurred "solely" for the employer's benefit;
  • Employee discounts on retail goods or services as long as the discounts are not tied to hours worked or services rendered;
  • 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, such as an "employee of the month" bonus, a bonus for overcoming a particularly difficult challenge and severance bonuses;
  • Benefit plans, including accident, unemployment and legal services; and
  • Tuition programs, such as reimbursement programs or repayment of educational debt.

The amendment also clarifies whether other forms of monetary compensation must be included in the regular rate, including meal period payments, "show-up" pay and "call-back" pay. For example, the amendment clarifies that call-back pay—additional compensation for calling an employee back to work after the employee's scheduled hours have ended—does not need to be included in the regular rate of pay unless the call-backs are so regular that they essentially are prearranged.

Importantly, however, the DOL continues to caution employers that the perks excludable from the regular rate cannot be wages in another guise. Any payments tied to hours worked, services rendered, job performance, credentials, longevity or other criteria linked to quality or quantity of an employee's work must still be included in the regular rate. For example, production bonuses and the cost of furnished board and lodging must be included in the regular rate because those types of payments are understood to be compensation for services, even if they are not directly attributable to any particular hours of work.

What This Means for Employers

In recent years, some employers have been reluctant to add certain perks to their compensation packages due to the risk of class action lawsuits for underpaid overtime. Others have conservatively included the value of the perks in their employees' regular rate of pay to avoid the risk of lawsuits, but at the expense of possibly paying more for overtime than necessary. The DOL's regular rate rule is only a proposal at this time and is subject to public comment and further revision, as well as potential legal challenges. If adopted, however, the rule would provide employers with much needed clarification regarding what perks must be included in, or may be excluded from, employees' regular rate of pay when calculating overtime wages.

With this added clarity, in many instances employers will be able to expand their compensation packages without the risk of increasing their overtime costs or incurring legal liability. Perks like tuition reimbursement, employee discounts on retail goods and free gym memberships can help employers attract and retain talent. With the unemployment rate hovering around just 4 percent and the demand for labor at a near all-time high, traditional compensation packages that include just wages, paid time off and insurance plan contributions are often not enough to keep good employees happy.

In light of the DOL's proposed rule—and the DOL's warnings that all compensation linked to quality or quantity of an employee's work must be included in the regular rate of pay—employers should consider evaluating their pay practices with the assistance of counsel to determine if those pay practices comply with the law. Such an evaluation can help employers offer more competitive compensation packages without increasing overtime costs and without increasing the risk of class action lawsuits.

Finally, employers might also consider commenting on the proposed rule by visiting regulations.gov. In order to be considered, comments must be made by May 28, 2019.

For Further Information

If you have any questions about this Alert, please contact Christopher D. Durham, Christopher D. Kanne, any of the attorneys in our Employment, Labor, Benefits and Immigration Practice Group or the attorney in the firm with whom you are regularly in contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.

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