Seyfarth Synopsis: In the December 16, 2019, Federal Register, the U.S. Department of Labor’s Wage & Hour Division (WHD) published its final rule clarifying and updating the regulations governing the regular rate requirements under the Fair Labor Standards Act (FLSA).

Generally, the FLSA requires overtime to be paid at a rate that is at least one and one-half times the “regular rate of pay.” Despite the significance of the regular rate to ensuring compliance with the FLSA, the regulatory provisions governing this critical issue have not been meaningfully updated in more than 50 years. In the final rule — which will take effect on January 15, 2020 — WHD seeks to address several of the issues that have confounded employers, as well as provide clarity on the proper treatment of several new and evolving methods of compensation. In addition, WHD revises the little-used “basic rate” of pay provisions, in a manner that it hopes will make those provisions more relevant (and more useful) in today’s economy.

The bulk of the final rule is spent clarifying whether certain kinds of benefits or “perks” must be included in the regular rate. Specifically, WHD explains that employers may exclude the following types of benefits/perks/payments 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; WHD also clarifies that reimbursements that do not exceed the maximum travel reimbursement under the Federal Travel Regulation System or the optional IRS substantiation amounts for travel expenses are per se “reasonable payments”;
  • 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.

WHD also provides examples to illustrate the types of bonuses that are discretionary and may be excluded from an employee’s regular rate, such as bonuses to employees who made unique or extraordinary efforts which are not awarded according to pre-established criteria, severance bonuses, referral bonuses for employees not primarily engaged in recruiting activities, bonuses for overcoming challenging or stressful situations, employee-of-the-month bonuses, and other similar compensation.

WHD further 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 so regular that they are essentially prearranged.

Finally, WHD updates its “basic rate” regulations. “Basic rate” is authorized under the FLSA as an alternative to the regular rate under specific circumstances. The current regulations contain a fairly unhelpful limitation, which all but eliminates its viability as an alternative: 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 $0.50 a week on average for overtime workweeks in the period for which the employer makes the payment. The final rule updates this regulation to change the $0.50 limit to 40 percent of the higher of the applicable local, state, or federal minimum wage. At the current federal level, this would be $2.90 per week on average, which would be high enough to exclude (for example) a $500 bonus paid quarterly to an employee averaging 45 hours per week.

As noted above, these provisions take effect on January 15, 2020.