Co-authored by Alexander J. Passantino and Brett Bartlett

Fed Register.bmpAs mentioned previously on this blog, the Department of Labor’s Wage and Hour Division has been in the process of finalizing regulations regarding the Fair Labor Standards Act.  Today the Wage and Hour Division published those regulations in the Federal Register.  The rules will be effective 30 days after publication.

Usually referred to as the FLSA Amendments rulemaking, much of the regulatory package addresses numerous statutory amendments that have been made to the FLSA over the past few decades.  For example, the new regulations update numerous references to the federal minimum wage to reflect the current minimum wage of $7.25.  The final regulation, however, is not simply limited to implementing “technical” revisions to existing regulations.

Division Questions Bonus Payments to Fluctuating Workweek Employees

Perhaps the most significant development in the regulatory package is not a revision at all.  Rather, the Wage and Hour Division elected not to implement proposed clarifying language in section 778.114, which relates to the application of the fluctuating workweek method of payment.  Under the fluctuating workweek method, an employee is paid a fixed salary for fluctuating hours.  If the employee works in excess of 40 hours in a workweek, the salary is divided by the number of hours worked, and the resulting rate is divided in half.  The half-time rate is then paid (in addition to the salary) for all hours worked in excess of 40.  The proposed clarifying language would have made clear that, in addition to his or her fixed salary, an employee could be paid bonuses and other non-overtime premiums without invalidating the fluctuating workweek pay method.  Instead, the Division will leave in place what many view to be ambiguous language in the current version of 778.114.

The Division explains in the Preamble to its revised regulations that it considered the comments from numerous sources explaining why bonus and other premium payments should or should not invalidate the fluctuating workweek pay methods.  The Division acknowledges that such payments benefit employees.  Ultimately, however, the Division concludes that “bonus and premium payments . . . .are incompatible with the fluctuating workweek method of computing overtime . . . .”

This is an interesting conclusion because the method of calculating overtime under the fluctuating workweek pay provision and that for calculating overtime on bonuses and similar non-overtime payments are virtually identical.  When a non-exempt employee is paid a nondiscretionary bonus, an additional amount may be due as an overtime premium (if the employee works any overtime hours during the time period covered by the bonus).  The determination of the proper rate at which the overtime premium is paid is made in precisely the same way as the fluctuating workweek half-time rate.  The bonus is divided by the number of hours worked, and the resulting rate is divided by one half.  The half-time rate is then paid (in addition to the bonus) for all hours worked in excess of 40.  Nevertheless, the Wage and Hour Division has taken the position in its Preamble to the new rule that these two identical methods of calculation are “inconsistent.” 

Despite its acknowledgement that bonuses and other non-overtime pay premiums benefit employees, the Division’s stated position will make the fluctuating workweek pay method invalid for any employee who receives them.  Under the Division’s interpretation, payment of such bonus or premium amounts would cause an employer to “lose” the ability to use the fluctuating workweek method (i.e., the employer will have to calculate the overtime rate based on 40 hours and a time and one-half overtime rate instead of as described above).  Presumably, this risk will result in fewer employers providing bonuses to their fluctuating workweek employees because of the substantial additional costs resulting from the Department’s interpretation.

Rule Requires Information to be Provided to Employees When Employer Takes Tip Credit, Addresses Tip Pooling

In an effort to resolve a dispute with respect to whether an employer must “inform” an employee of the tip credit provisions or must “explain” how those provisions work, in the 2008 proposal, the Wage and Hour Division proposed that an employer must inform its employees that it intends to avail itself of the tip wage credit.  The proposal went on to state that the notice shall be provided in advance of the employer’s use of the tip credit and must advise employees that their employer intends to treat tips as satisfying part of the employer’s minimum wage obligation.  The Division proposed that the notice did not need to be provided in writing.

The final regulation also requires than an employer “inform” its employees, but requires that much more information be provided.  Under the final regulations, an employer seeking to use the tip credit must inform a tipped employee (before it utilizes the tip credit) of the following:

  • the direct cash wage the employer is paying a tipped employee;
  • the additional amount the employer is using as a credit against tips received, which cannot exceed the difference between the minimum wage and the actual cash wage paid by the employer to the employee;
  • that the additional amount claimed by the employer on account of tips as the tip credit may not exceed the value of the tips actually received by the employee;
  • that the tip credit shall not apply with respect to any tipped employee unless the employee has been informed of the tip credit provisions; and
  • that all tips received by the tipped employee must be retained by the employee except for the pooling of tips among employees who customarily and regularly receive tips.

Furthermore, although the Division is not requiring written notification of these terms to the employees, it notes that “employers may wish to do so, since a physical document would, if the notice is adequate, permit employers to document that they have met” these requirements.

In addition, the final regulation addresses the issue of the maximum amount an employer may require an employee to contribute to a tip pool.  The final regulation adopts the proposal to eliminate a limitation on the maximum permissible contribution percentage.  The Division will also require employers to notify employees of tip pool contribution requirements, limits the employer’s use of tip credit to the amount of tips ultimately receives, and states that the  employer “may not retain any of the employees’ tips for any other purpose.”

Other Issues Addressed Include Definition of Employee Engaged in “Fire Protection Activities”; Division Declines to Act on Public Sector Compensatory Time Off, Automobile Service Managers, Meal Credits

Among the other issues addressed in the final rule, the Division is:

  • Adding reference to the statutory conditions under which commuting in an employer-provided vehicle will not be compensable under Employee Commuting Flexibility Act of 1996;
  • Adopting statutory amendment regarding employees engaged in fire protection activities and eliminating existing 20% tolerance rule for such employees (but maintaining it for law enforcement personnel);
  • Declining to adopt proposed rule to exempt from overtime service managers, service writers, service advisors, and service salesmen of automobiles (and certain other vehicles);
  • Stating that tips are in all cases the property of the employee (except in connection with a valid tip pool);
  • Committing to “study” issues related to employers’ ability to take a wage credit for employer-provided meals where employees have religious or dietary restrictions and/or do not have adequate time to eat;  and
  • Declining to adopt proposal that stated that the compensatory time rules for public sector employers do not require a public agency to allow the use of compensatory time on the day specifically requested, but only require that the agency permit the use of the time within a reasonable period after the employee makes the request, unless the use would unduly disrupt the agency’s operations; instead, current rule requires use on specific day requested, unless request is unduly disruptive.

Some of these provisions will have wide impact across a number of industries; others are necessarily limited.  Regardless, employers in all industries should take time to review their policies and practices to ensure compliance with the new provisions.