Revised Federal Rules Exclude Modern Perks and Benefits From the Regular Rate of Pay for Overtime Purposes

In a development sure to be welcomed by employers, the U.S. Department of Labor (DOL) issued revised regulations allowing employers to more easily offer perks and benefits to their employees without affecting the employees’ overtime rates. The revised regulations were published on December 16, 2019, in the Federal Register and will be effective on January 15, 2020.

The revised regulations mark the first significant update to the regulations governing the regular rate requirements under the Fair Labor Standards Act (FLSA) in more than 50 years. Those requirements define what forms of payment employers include and exclude in the FLSA’s “time and one-half” calculation when determining overtime rates.

The previous regulatory landscape had left employers uncertain about the role that perks and benefits played in the calculation of the regular rate of pay, particularly with respect to newer, modern perks, such as wellness programs and payments for unused paid leave. The new regulations clarify which perks and benefits must be included in the regular rate of pay, as well as which perks and benefits an employer may provide without including them in the regular rate of pay.

Exclusions From Regular Rate of Pay

The DOL clarified the regulations to confirm that employers may exclude the following from an employee’s regular rate of pay:

• the cost of providing certain parking benefits, wellness programs, onsite specialist treatment, gym access and fitness classes, employee discounts on retail goods and services, certain tuition benefits (whether paid to an employee, an education provider, or a student-loan program), and adoption assistance;
• payments for unused paid leave, including paid sick leave or paid time off;
• payments of certain penalties required under state and local scheduling laws;
• reimbursed expenses including cellphone plans, credentialing exam fees, organization membership dues, and travel, even if not incurred “solely” for the employer’s benefit;
• certain sign-on bonuses and certain longevity bonuses;
• the cost of office coffee and snacks to employees as gifts;
• discretionary bonuses (by clarifying that the label given a bonus does not determine whether it is discretionary and providing additional examples); and
• contributions to benefit plans for accident, unemployment, legal services, or other events that could cause future financial hardship or expense.

The revised rules also clarify that reimbursements that do not exceed the maximum travel reimbursement under the Federal Travel Regulation or the optional United States Internal Revenue Service substantiation amounts for travel expenses are per se “reasonable payments.”

Bonuses, Call-Back Pay, and Basic Rate

The revised regulations include the additional clarification that the label given a bonus does not determine whether it is discretionary, and they provide fact-based examples of discretionary bonuses that may be excluded from an employee’s regular rate of pay under the FLSA. (See section 7(e)(3).)

In addition, the DOL makes two substantive changes to the existing regulations. First, the DOL eliminates the restriction that “call-back” pay and other payments similar to call-back pay must be “infrequent and sporadic” to be excludable from an employee’s regular rate, while maintaining that such payments must not be prearranged. (See sections 778.221 and 778.222.)

Second, the DOL updates its regulations pertaining to the “basic rate,” which is authorized under the FLSA as an alternative to the regular rate under specific circumstances. (See section 7(g)(3).) Under the revised regulations, employers using an authorized basic rate may exclude from the overtime computation any additional payment that would not increase total overtime compensation by more than 40 percent of the higher of the applicable local, state, or federal minimum wage a week on average for the overtime workweeks in which the employer makes the payment.

Key Takeaways

The revised regulations are a welcome and favorable development for employers because they provide overdue clarification regarding which perks and benefits may be excluded from the regular rate in calculating overtime. The revised regulations also provide needed clarification on the call-back pay restrictions and basic rate. Employers may want to review closely any state law requirements for calculating the regular rate for overtime purposes. In some cases, state law follows federal law in this regard.