The US Department of Labor (DOL) has issued a final rule updating its guidance under the Fair Labor Standards Act (FLSA) of what payments and benefits can be excluded when calculating the regular rate of pay on which employee overtime premiums are based. This guidance defines the types of payment employers can exclude when determining workers’ overtime rates. Calculating the regular rate has long been difficult for employers, and has become more difficult as the types of perks, benefits, and bonuses has expanded. The DOL’s guidance had not been updated in over 50 years and does not account for many of the more modern offerings. The DOL hopes that the new rule, characterized as an “update” rather than a major substantive change, will clarify areas of confusion for employers and encourage employers to provide more job perks to nonexempt employees.
The final rule was published on December 16, 2019, in the Federal Register, with an effective date of January 15, 2020.
The final rule largely tracks the proposed rule, discussed in detail in a previous LawFlash, but includes a few additional clarifying examples, and provides additional insight into DOL’s views on specific benefits in the preamble. Specifically, the final rule makes clear that the following types of payments need not be included in the regular rate of pay:
In addition, the final rule provides examples of discretionary bonuses that can be safely excluded from the regular rate. These examples include bonuses paid to employees who make unique or extraordinary efforts that are not awarded according to pre-established criteria, severance bonuses, bonuses for overcoming challenging or stressful situations, and employee-of-the-month bonuses, so long as the bonuses are paid near the end of the period to which the bonus corresponds and are not paid pursuant to any prior agreement. The DOL also reiterated its position that the label given to a bonus does not determine whether it is discretionary.
The final rule also adds examples of payments that may be excluded from the regular rate of pay, noting that financial counseling, mental health wellness programs, and adoption assistance (including financial assistance, legal services, or information and referral services) are not payment for hours worked and are therefore excludable. It also addresses specific types of payments that must be paid pursuant to state scheduling laws, such as “clopening” pay, predictability pay, and right-to-rest pay, stating that such payments may be excluded.
The final rule makes only two substantive changes to the existing regulation. First, it eliminates the requirement that call back pay and other similar payments be “infrequent and sporadic” to be excludable. Such payments now may be excluded as long as they are not so regular that they can be considered prearranged. Second, the rule 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. Under the final rule, employers using an authorized basic rate may exclude from the overtime computation any additional payment that would not increase total overtime compensation by more than 40% of the higher of the applicable local, state, or federal minimum wage a week on average for the overtime workweeks in which the employer makes the payment.
What incentive compensation and benefits are included or excluded in the regular rate has long created uncertainty for employers, so this clarification of DOL’s position is overdue and welcome news for employers. Now that DOL has clarified its position on certain benefits and payments, employers may want to consider offering these benefits and payments to their nonexempt workers. Before offering these benefits or implementing changes, however, employers should consult with counsel to ensure the benefit fits within the parameters laid out by DOL, check whether state law tracks or departs from the federal law, and audit their payroll practices to ensure that they are correctly calculating overtime payments.
Employers may also want to review changes to their benefits and regular rate calculations in light of any changes caused by the new overtime salary thresholds taking effect on January 1, 2020.
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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
 DOL also clarified in the final rule that travel reimbursements that do not exceed the maximum travel reimbursement under the Federal Travel Regulation System or the rates set by the IRS are per se “reasonable payments.”