A recent proposal by the US Department of Labor seeks to provide greater clarity and more examples of the types of payments and benefits that do not need to be included in calculating the regular rate on which an employee’s overtime pay is based. Companies should consider auditing their current calculation practices to ensure they are in compliance with the current guidance.
The US Department of Labor (DOL) published proposed updates on March 29 for its guidance under the Fair Labor Standards Act (FLSA) on what payments and benefits can be excluded when calculating the regular rate on which employee overtime premiums are based. The DOL is hoping that updated guidance on this topic will provide greater clarity for employees and employers, and that the changes will encourage employers to provide more benefits and will decrease litigation. The reality is more complicated. Public comments on the proposed changes are due by May 28, 2019.
The FLSA requires that employers pay nonexempt employees overtime pay at one and one-half times their “regular rate” for all hours worked over 40 in a workweek. This rate includes not just wages, but also all “remuneration for employment.” This means employers must consider all payments—bonuses, commissions, shift differentials, incentive payments, and a whole laundry list of other compensation—when computing an employee’s overtime pay.
There are eight statutory exclusions to this general rule:
The DOL’s regulations at 29 CFR Part 778 interpret and apply these exclusions. But, as the DOL explains in its proposal, the majority of these provisions were promulgated more than 50 years ago, “when typical compensation often consisted predominantly of traditional wages.” Workplaces have changed since then, and the proposal seeks to update the rule accordingly.
The DOL is proposing to amend its interpretation to clarify its view that the following types of payments need not be included in the regular rate of pay:
The proposal also provides additional examples of discretionary bonuses that can be excluded from the regular rate. These examples include bonuses paid to employees who make unique or extraordinary efforts that are not awarded according to preestablished criteria, severance bonuses, bonuses for overcoming challenging or stressful situations, and employee-of-the-month bonuses. The DOL also reiterated its position that the label given to a bonus does not determine whether it is discretionary.
The DOL’s proposed rule also includes clarification about payment for meal periods and callback pay. In addition, the DOL proposes changes to a little-used regulation governing employers that use a “basic rate,” rather than the regular rate, to calculate overtime compensation. Under the current regulations, employers using an authorized basic rate may exclude from the overtime computation any additional payment that would not increase the overtime compensation by more than $0.50 a week. The Department’s proposal would update this regulation to change the $0.50/week limit to 40% of the federal minimum wage, or $2.90/week currently.
The DOL seeks comments on a variety of issues in the proposal. The DOL specifically requests comments on the sorts of bonuses and benefit programs employers are offering and whether clarification on exclusions from the regular rate would be helpful. The DOL also seeks comment on whether it should provide additional examples of payments that are not considered compensation for work and thus should be excluded from the regular rate. Comments must be submitted by May 28, 2019.
At this point, it is unclear when final regulations will be published, but we do expect them to be issued before the end of the year. The effective date of the new regulations will likely be at least 30–60 days after they are published.
The DOL’s proposed revisions to its guidance on what payments and benefits can be excluded from the regular rate is of interest to the vast majority of employers given the prevalence of incentive compensation and benefit programs offered. Consequently, employers in all industries should consider the following actions.
First, companies and trade associations affected by the proposal should consider submitting comments to ensure that the regulatory record reflects the true impact of any proposed changes and to shape the final rule.
Second, the publicity generated by the proposed changes may cause a number of employees to question whether the remuneration they receive is properly included in the regular rate. Thus, although any final regulatory changes are not imminent, we recommend that companies consider auditing their current practices with regard to calculating the regular rate to make sure that payroll practices are in compliance. Additionally, when considering offering new incentive compensation or benefits, consider whether the remuneration can be excluded from the regular rate based on current and proposed guidance, and when the final rule is published, be prepared to act accordingly.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
Anne Marie Estevez
Michael J. Puma
Christopher K. Ramsey
Michael D. Schlemmer