On March 28, 2019, the US Department of Labor announced a proposed rule to clarify that certain types of compensation and benefits can be excluded from an employee’s “regular rate” of pay, which is used to calculate overtime under the FLSA. This announcement follows the DOL’s recent proposal to increase the minimum salary requirements for the FLSA’s white-collar overtime exemptions, continuing the DOL’s efforts to update and modernize FLSA regulations.

Regulating the Regular Rate

Under the FLSA, employers must pay non-exempt employees overtime at one and a half times their “regular rate” for all hours worked over 40 in a workweek. Calculating an employee’s “regular rate” can be a challenge, as the regular rate must include all forms of compensation, not just base salary, unless a statutory exclusion applies. The existing regulations, which have been in place for over fifty years, identify traditional benefits that are excludable under the FLSA, such as health insurance and vacation pay.

But times they are a-changin’.

As compensation and benefits practices have evolved, employers have faced uncertainty as to whether modern “perks” like fitness classes, stress reduction programs and tuition reimbursement must be included in an employee’s regular rate. Similar questions have arisen regarding pay practices required by the rapid spread of paid sick leave and scheduling laws across the country.

To eliminate these uncertainties, the DOL’s proposed rule would confirm that employers need not include these “modern” types of compensation and benefits in regular rate and overtime calculations, such as:

  • Gym access and memberships, fitness classes, wellness programs and onsite treatment from massage therapists and other specialists;
  • Employee discounts on retail goods and services;
  • Payout of unused paid time off and paid sick leave;
  • Accident, unemployment, and legal service benefits plans;
  • Tuition reimbursement and repayment of educational loans;
  • Scheduling pay, such as “right to rest” and “predictability pay”; and
  • Reimbursed expenses that were not solely for the benefit of the employer.

The DOL’s proposed rule also seeks to clarify the distinction between discretionary bonuses, which are excludable from the regular rate, and non-discretionary bonuses, which must be included. The existing regulations contain examples of non-discretionary bonuses, and the new rule, if adopted, would add examples of discretionary bonuses, such as “employee of the month” bonuses and bonuses for unique or extraordinary efforts awarded without any pre-established criteria.

Impact on Employers

Good news: the proposed rule, if adopted, would impose no new requirements on employers. Rather, the proposal seeks to clarify existing obligations under the FLSA and to encourage employers to provide benefits they may not have offered due to concerns about potential overtime consequences.

The rule is open for public comment through May 29, 2019, and the rule-making process will likely continue for several months after that. Meanwhile, the existing rules will remain in effect. We will provide an update as soon as it becomes available.

For more, please reach out to your Baker McKenzie employment lawyer.