Tina Tellado is a Partner and Deisy Castro is an Associate in Holland & Knight's Los Angeles office

HIGHLIGHTS:

  • The U.S. Department of Labor has proposed a rule updating the calculation of a nonexempt employee's regular rate of pay for overtime pay purposes.
  • The proposed rule is intended to better reflect the modern workplace and provide clarity to employers on what types of compensation, benefits or perks must be included in the regular rate or may be excluded from the regular rate.

The U.S. Department of Labor (DOL) published its proposed rule regarding the calculation of the "regular rate" under the Fair Labor Standards Act (FLSA) on March 29, 2019. For the first time in more than 60 years, the proposed rule, if adopted, will provide some long-awaited clarity and updating regarding the types of miscellaneous items that may be excluded from an employee's "regular rate" of pay.

Under the FLSA, a nonexempt employee must be compensated "at a rate of not less than one and one-half times the regular rate of which he is employed" for any hours the employee works in excess of 40 hours in a workweek. The "regular rate" is defined as "all remuneration for employment paid to, or on behalf of, the employee," subject to the eight categories of exclusions set out in Section 7(e) of the FLSA. These exclusions, which involve certain compensation, benefits or perks, have been extensively litigated. Accordingly, an understanding of what types of compensation, benefits or perks must be included in, or may be excluded from, the "regular rate" is integral to an employer's ability to properly compensate its employees for overtime work. Unfortunately, the DOL promulgated most of the regulations interpreting the application of and exceptions to the "regular rate" more than 60 years ago. The DOL's proposed updates are intended to reflect changes in the modern workplace, as well as provide clarity to employers and employees alike.

Highlights of the Proposed Rule

Under its proposed rule, the DOL confirms that employers may exclude the following from an employee's "regular rate" of pay: 1) the cost of providing wellness programs, onsite specialist treatment, gym access and fitness classes, and employee discounts on retail goods and services; 2) occasional payments for foregoing use of leave, regardless of the type of leave or whether they are paid in the same pay period in which the leave is foregone or during a subsequent pay period; 3) reimbursed travel expenses that do not exceed the maximum travel reimbursement permitted under the Federal Travel Regulation System and that satisfy other regulatory requirements; 4) tuition programs, such as reimbursement programs or repayment of educational debt; 5) reimbursed expenses, even if not "solely" for the employer's benefit; and 6) benefit plans, including accident, unemployment and legal services.

The DOL's proposed changes also include examples of bonuses that may be discretionary and, thus, excluded from the "regular rate," including employee-of-the-month bonuses, bonuses to employees who made unique or extraordinary efforts and not awarded based on pre-established criteria, severance bonuses, and bonuses for overcoming stressful or difficult challenges. The proposed changes also confirm that a label given to a bonus does not determine whether it is discretionary.

The proposed rule also clarifies the proper treatment of other forms of compensation, including payment for meal periods, "call-back" pay and the "basic rate" alternative to the "regular rate." For instance, payments for a bona fide meal period are not included in the "regular rate" unless agreement or actual course of conduct establishes that the parties have treated the time as hours worked. "Call-back" pay and other payments similar to call-back pay need not be "infrequent and sporadic" to be excludable from the "regular rate," but must not be so regular that they are essentially prearranged.

Next Steps

The DOL's proposed changes were announced in a Notice of Proposed Rulemaking (NPRM). The proposed rule is not yet final and the public is able to submit comments in the rulemaking docket RIN 1235-AA24. All public comments must be submitted by May 28, 2019, in order to be considered. Following the close of the comment period, the DOL may revise the rule before it is finalized and published in the Federal Register.

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