The Department of Labor (DOL) recently proposed amended regulations that would, for the first time in decades, update the “regular rate” requirements under section 7(e) of the Fair Labor Standards Act (FSLA). This is welcome news for employers who may have been hesitant to offer new, nontraditional benefits due to uncertainty regarding whether the value of such benefits might affect a “regular rate” calculation and create potential exposure for overtime claims.

The FLSA generally requires covered employers to pay nonexempt employees overtime pay of at least one and one-half times their “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” – subject to certain exclusions. 

When the DOL initially promulgated the rule (which has remained substantively unchanged for sixty years), typical compensation predominantly consisted of traditional wages, paid time off for holidays and vacations, and basic contributions to medical, life insurance and disability benefit plans. Today’s employers compensate their employees through a number of additional methods and often provide additional perks, such as wellness and tuition reimbursement programs. This has caused confusion as to the proper calculation of an employee’s “regular rate” under the current regulations, and resulting litigation. 

If adopted, the proposed rule would provide clarity to employers and employees that the following are excludable from the “regular rate” calculation:

• Pay for Foregoing Holidays or Leave. Previously, the rule specified categories of payments made for non-working time, when such payments were in amounts approximately equivalent to the employee’s normal earnings. Acknowledging the trend of employers moving away from categories such as “sick leave” or “vacation leave,” the new rule proposes eliminating the categories and clarifies that the occasional payments for forgoing the use of leave are treated the same, no matter the type of leave taken. All payments made for forgoing any type of leave will be excludable from regular rate calculations under the proposed rule, so long as the amount paid is approximately equivalent to the employee’s normal earnings for a similar period of time.
• Compensation for Bona Fide Meal Periods. The proposed rule would remove the prior use of the term “lunch periods” to clarify that all bona fide meal periods are exempt from the regular rate calculation. Employers and employees, however, may (by agreement or course of conduct) provide that meal periods are working hours, in which case the compensation for those times will be used to calculate into the regular rate.
• Reimbursable Expenses. The proposed regulation provides that employers may exclude reimbursed expenses from the regular rate of pay calculation, even if those expenses were not incurred “solely” for the employer’s benefit. The prior regulation limited reimbursable expenses to those “solely” in the interest of the employer. The DOL also proposed additional explanation as to what is “reasonable” by referring to the Federal Travel Regulation. 
• “Other Similar Payments.” The DOL also sought to clarify the meaning of the phrase “other similar payments to an employee which are not made as compensation for his hours of employment.” This phrase is used in the current regulation to provide that such “other similar payments” are excluded from the regular rate calculation, but it does little to define what other similar payments might include. The proposed regulation defines “other similar payments” as payments that are unconnected to the employee’s quality or quantity of work. While acknowledging that it could not provide an exhaustive list, the DOL identified the following benefits examples: parking space payments, on-site treatment of chiropractors, massage therapists, personal trainers, employee discounts on retail goods or services, wellness programs, gym memberships, and tuition or other continuing education expenses.

The proposed amendments also clarified the meaning of a “discretionary bonus,” which is traditionally excluded from the “regular rate” calculation. Specifically, the DOL’s proposal states that the label assigned to a bonus is not determinative; instead, the statutory terms and the facts specific to the bonus at issue determine whether a bonus is an excludable discretionary bonus. Examples of discretionary bonuses include employee-of-the-month bonuses, bonuses to employees who make unique and extraordinary efforts that are not awarded according to pre-established criteria, and severance bonuses. The touchstone of whether a bonus is “discretionary” is whether the fact and amount of payment are in the sole discretion of the employer.

The proposed amendments are intended “to promote compliance with the FLSA; provide appropriate and updated guidance to employers with evolving worker benefits, including employers that offer paid leave; give clarity concerning the proper treatment of scheduling-penalty payments under the FLSA; and encourage employers to provide additional and more creative benefits without fear of costly litigation.” The DOL estimated that the change would save $28 million annually by reducing litigation. 

The regulation will be open for comment until May 28, 2019, at www.regulations.gov. A final rule will be issued thereafter. 

Taft’s Labor and Employment attorneys will continue to monitor the rule making process governing these amendments, and will advise when final regulations are issued. In the interim, employers should determine whether any adjustments to employee benefits are warranted, in anticipation of the clarifying regulations.