DOL Proposes Revisions to Calculation of Regular Rate of Pay

By Fiona W. Ong - Shawe Rosenthal LLP

March 29, 2019

The Fair Labor Standards Act requires employers to pay overtime to non-exempt employees for all hours worked over 40 in a workweek, calculated at one and one-half times their regular rate of pay. The Department of Labor has issued a proposed rule that revises the requirements regarding the regular rate of pay in order to better reflect the modern workplace.

The regular rate rule was originally implemented over 60 years ago, as the DOL notes, “when typical compensation often consisted predominantly of traditional wages; paid time off for holidays and vacations; and contributions to basic medical, life insurance, and disability benefits plans.” Those benefits have evolved significantly since then, and the proposed rule is intended to provide clarity on when certain benefits should or should not be included in the determination of the regular rate.

Under the proposed rule, the DOL states that the following may be excluded from the regular rate:

• Pay for unused paid leave, including sick leave.
• Compensation for bona fide meal periods, when an employee is not working.
• Reimbursement for expenses, even if not incurred “solely” for the employer’s benefit.
• Reimbursement for travel expenses that do not exceed the maximum travel reimbursement under the Federal Travel Regulation System and that satisfy other regulatory requirements.
• Discretionary bonuses for which the fact and amount of payment is in the sole discretion of the employer until at or near the end of the periods to which the bonuses correspond and that are not paid “pursuant to any prior contract, agreement, or promise causing the employee to expect such payments regularly.” Examples of such bonuses include employee-of-the-month bonuses, bonuses to employees who made unique or extraordinary efforts which are not awarded according to pre-established criteria, severance bonuses, or bonuses for overcoming stressful or difficult challenges.
• Benefit plans, including accident, unemployment, and legal services.
• Other similar payments that “do not function as formulaic wage supplements and are not tied to hours worked, services rendered, job performance, credentials, longevity, or other criteria linked to the quality or quantity of the employee’s work, but are conditioned merely on one being an employee.” Examples of such payments include:
        - Onsite specialist treatment (e.g. chiropractors, massage therapists, personal trainers, counselors, Employment Assistance Programs, or physical therapists).
        - Gym access, gym memberships, and fitness classes.
        - Wellness programs.
        - Employee discounts on retail goods and services.
        - Tuition benefits.

The DOL also clarifies that show-up pay, call-back pay and similar payments may be compensation that should be included in the regular rate of pay, regardless of past practice, an employment agreement, or state or local law. These payments would be included in the regular rate if they are so regular that they have become, in effect, prearranged.

The DOL recognizes the implementation of scheduling laws in a number of jurisdictions that impose penalties for scheduling changes, and offers guidance on whether such penalties should be included in the regular rate:

• “Reporting” pay (for employees who are unable to work their scheduled hours because the employer subtracted hours from a regular shift before or after the employee reports for duty) would be treated like show-up pay – included in the regular rate for hours actually worked, and excluded beyond that.
• “Clopening” or “right to rest” (for employees who work the end of one day’s shift and the start of the next day’s shift with fewer than 10 or 11 hours between the shifts, or who work during a rest period), and “predictability” (for employees who do not receive the requisite notice of a schedule change) pay would generally be excluded.
• “On-call” pay (for employees with a scheduled on-call shift but who are not called in to work) may be included in the regular rate when such payments are “compensation for performing a duty involved in the employee’s job.”

The DOL also clarifies that employers do not need a formal contract or agreement with employees to exclude overtime premiums from the regular rate.

In addition, the DOL explains that the list of excluded payments and examples provided are not exhaustive. There may be other payments that could qualify as excludable payments from the regular rate under the FLSA.

Finally, the FLSA permits employers to use a basic rate, rather than a regular rate, to calculate overtime under certain specified circumstances. One of the authorized basic rates excludes “additional payments in cash or in kind which, if included in the computation of overtime under the Act, would not increase the total compensation of the employee by more than 50 cents a week on the average for all overtime weeks . . . in the period for which such additional payments are made.” The DOL proposes to eliminate the reference to $.50, and replace it with “40 percent of the applicable hourly minimum wage under section 6(a) of the Act.”

There will be a 60-day comment period following publication of the Notice of Proposed Rulemaking in the Federal Register. You may submit comments electronically at https://www.regulations.gov/. Once the 60-day period has closed, the DOL will take some time to consider the comments and then subsequently issue the final rule.