Last week, the US Department of Labor announced a final rule (the New Rule) that updates several regulations regarding what forms of payment employers can exclude in the “time and one-half” calculation for overtime pay. The New Rule clarifies that employers can exclude a range of employee perks and state-mandated payments in calculating overtime under federal law.

Brief background on the ‘regular rate’

The Fair Labor Standards Act requires employers to pay nonexempt employees at least one and one-half times the employees’ “regular rate” for hours worked in excess of 40 per workweek. The FLSA defines the “regular rate” as “all remuneration for employment paid to, or on behalf of, the employee.” Decades ago, the DOL issued several regulations addressing how employers must calculate the regular rate under Part 778 of CFR title 29. However, those regulations left today’s employers with uncertainties about how to treat payments common in modern employee compensation packages and required under state scheduling and paid-leave laws.

The New Rule

In a much welcomed development among employers, the New Rule clarifies that employers may exclude from an employee’s “regular rate” payments for the following:

1. Unused paid leave, such as paid sick leave or paid time off;
2. Certain penalties required under local and state scheduling laws, such as “reporting time” or “show up” pay (like the kind required in California and New York), “call back” pay, and pay for failing to give an employee sufficient notice to report for work, even if such payments are not “infrequent or sporadic” (but such payments cannot be prearranged);
3. Parking benefits, wellness programs, gym access and fitness classes, discounts on retail goods and services, tuition benefits and adoption assistance;
4. Office coffee and snacks; and
5. Reimbursements for expenses including cell phone plans, membership dues, and credentialing exams.

In addition, the New Rule provides additional examples of discretionary bonuses that may be excluded from the regular rate. Although the FLSA regulations have long permitted employers to exclude discretionary bonuses, the DOL and plaintiffs’ lawyers often challenge bonus payments as not qualifying as truly discretionary. While the New Rule reiterates that “the label or name assigned to bonuses” does not control, it gives examples of bonuses that “may” be discretionary, such as:

• Bonuses to employees who made unique or extraordinary efforts that are not awarded according to pre-established criteria,
• Referral bonuses for employees not primarily engaged in recruiting activities, and
• Employee-of-the-month bonuses.

The New Rule is set to be published in the Federal Register on December 16, 2019, which means it would take effect on January 15, 2020. The full text of the New Rule is available here, and the DOL’s press release on the New Rule is here.

Key takeaways

The New Rule provides employers more certainty in calculating overtime payments and better defenses in the face of challenges to their overtime-payment policies. Accordingly, employers should take another look at their pay practices with the New Rule in mind. However, employers should remember that courts will not necessarily use the New (federal) Rule to interpret state overtime laws; indeed, California has departed from federal law on overtime issues in the past. Thus, if you have questions about how the New Rule affects your business, please reach out to one of the key contacts listed.