April 01, 2019

Calculating Overtime Pay Will Be Simpler if Department of Labor Adopts Proposed Updates to FLSA Regular Rate Regulations

Proposed regulations issued by the U.S. Department of Labor (DOL) on March 29, 2019 will, if adopted, clarify and greatly simplify the overtime pay calculations for non-exempt employees under the federal Fair Labor Standards Act (FLSA). The DOL has not updated the regular rate regulations in more than 50 years, so the proposed regulations are intended to better define and streamline the regular rate for today’s workplace practices.

Under the FLSA, overtime compensation is based on the employee’s regular rate of pay, which is a legal term of art and is not necessarily equal to the employee’s base hourly rate of pay if the employee receives certain types of additional compensation beyond the base hourly wage. Under the current regulations, employers may be discouraged from offering forms of bonus pay that must be included in the regular rate when calculating overtime, as well as certain “perks” which must also arguably be included in the regular rate.

Expanded Discretionary Bonus Definition

Under the current regulations, discretionary bonuses are excluded from the regular rate while nondiscretionary bonuses are included. The proposed regulations expand the definition of discretionary bonuses by listing the following as examples of bonuses that may be deemed discretionary:

  • Bonuses 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
  • Employee of the month bonuses
  • Similar compensation

These examples may encourage employers to offer such bonuses as they may be excluded from the regular rate.

Cashed-Out Paid Leave Would Not Be Included in Regular Rate

The current regulations also provide that, if an employee takes time off from work and uses paid leave (such as vacation or sick leave), the payment is not included in the regular rate. Under the proposed regulations, if an employee cashes out paid leave instead of taking the time off, that payment also is not included in the regular rate. This proposal may encourage employers to allow employees to cash out paid leave in lieu of taking the time off from work.

Additionally, the proposed regulations provide that the following may be excluded from the regular rate:

  • The cost of providing wellness programs, onsite specialist treatment, gym access and fitness classes, and employee discounts on retail goods and services
  • Reimbursed expenses, even if they are not “solely” for the employer’s benefit
  • Reimbursed travel expenses that do not exceed the maximum travel reimbursement permitted under the Federal Travel Regulation System regulations and meet other regulatory requirements
  • Pay for time that does not qualify as “hours worked,” including bona fide meal periods (unless an agreement or established practice indicates the parties have treated the time as hours worked)
  • Benefit plans, including accident, unemployment and legal services
  • Tuition programs, such as reimbursement programs or repayment of educational debt

The proposed regulations do not have the effect of law as of yet. The public may submit comments to the DOL regarding the proposed regulations through May 28, 2019. The DOL will consider the comments before issuing the final regulations, which may differ from the proposed regulations but will have the effect of law.

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