New FLSA Rules: What Counts Toward the “Regular Rate”?

The holidays came early for employers courtesy of the U.S. Department of Labor (“DOL”). On December 16, 2019, the Department published its final rules on what must be counted towards an employee’s “regular rate” of pay. Under the Fair Labor Standards Act (“FLSA”), the “regular rate” of pay is generally the rate used to calculate the overtime premium due to a non-exempt employee when they work over 40 hours in a workweek. Because most of the DOL’s current rules on the “regular rate” were developed over 50 years ago, these changes provide much-needed clarity to what kinds of compensation and benefits must be included in the “regular rate.”

The new rules clarify and confirm that employers may exclude the following from an employee’s 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 (with no “claw-back” provision) 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; and,
  • contributions to benefit plans for accident, unemployment, legal services, or other events that could cause future financial hardship or expense.

These clarifications should give many employers peace-of-mind regarding their current pay practices. In particular, the new rules clarify the uncertain question of whether PTO pay could be excluded, since the DOL’s existing rules did not appear to contemplate PTO as an excludable form of non-work pay. In addition, the DOL’s exclusion of “any other paid leave required under state or local laws” is a welcome clarification for employers operating in states or localities that now require paid leaves; as a contrary interpretation may have required additional pay to non-exempt employees who worked overtime during a week when they received paid leave mandated by law.

The DOL’s expansion of the kinds of bonuses that can be excluded is also welcome, but the Department declined to broadly exclude bonuses from the regular rate as some employers had hoped. Thus, employers who provide bonuses to non-exempt employees should remain mindful that most bonuses are not excluded from a non-exempt employee’s regular rate, and should therefore pay an additional overtime premium based on such bonuses when necessary.

Finally, there are two substantive changes in the new rules. First, the DOL eliminated the requirement that “call-back” pay and similar payments must be “infrequent and sporadic” to be excluded. Instead, the DOL has stated that such payments are excludable from the regular rate when they are not so regular as to be essentially pre-arranged. The practical effect of this change will remain to be seen, but it provides employers more flexibility in excluding payments for call-back pay.

Second, the DOL has revised its regulations regarding an alternative to the regular rate – the “basic rate.” The “basic rate” is an infrequently-used alternative to the “regular rate” authorized by the FLSA which contains several special requirements. Under the new rules, employers using an authorized “basic rate” may now exclude from overtime computation any additional payment that would not increase total overtime compensation by more than 40 percent of the applicable local, state, or federal minimum wage. In practical terms, this changes the exclusion from the current $.50 to at least $2.90 (40% of the current federal minimum wage of $7.25 per hour). It is unclear whether this change will cause use of a “basic rate” to become more attractive to certain employers.

While these clarifications and changes put to rest some long-standing questions under the FLSA, it is important for employers to realize that state and local laws do not always follow the regulations and interpretations of the FLSA (California being the most notorious example). Before making changes to pay practices or policies based on the DOL’s new rules, employers should consult with experienced wage and hour counsel regarding the requirements of their state or local laws on these questions as well.

The Departments new rules are set to take effect January 16, 2020.

The St. Louis employment attorneys at McMahon Berger have been advising employers across the country on wage and hour issues for over sixty years, and are available to discuss these issues and others. As always, the foregoing is for informational purposes only and does not constitute legal advice regarding any particular situation as every situation must be evaluated on its own facts. The choice of a lawyer is an important decision and should not be based solely on advertisements.