March 28, 2019
On March 28, for the first time in 50 years, the Department of Labor (DOL) proposed changing the definition of the “regular rate” of pay—the building block for calculating overtime. If the planned exclusions from the regular rate are adopted, employers may pay less in overtime than plaintiffs’ attorneys would like.
But companies may be likelier to provide more benefits such as tuition reimbursement, said Tammy McCutchen, an attorney with Littler in Washington, D.C.
“With clarity that certain perks and benefits are excludable from the regular rate, employers can be more generous in expanding their offerings of perks and benefits,” noted Liz Washko, an attorney with Ogletree Deakins in Nashville, Tenn. “This is not just due to limiting the financial costs of such offerings, but also reducing the potential administrative burden of tracking and properly calculating the overtime rate while taking these kinds of compensation into account.”
The Regular Rate of Pay
When calculating overtime under the Fair Labor Standards Act (FLSA), employers must pay nonexempt employees an overtime rate of 1 1/2 times their regular rate of pay for all hours worked beyond 40 a week.
This is not 1 1/2 times their hourly rate, McCutchen noted. The regular rate includes hourly wages or salary, most bonuses, shift differentials, on-call pay and commissions. It excludes benefits, paid leave, Christmas bonuses, other gifts and discretionary bonuses, she explained.
“Unless a particular payment is specifically excluded by the statute, it must be included when calculating the regular rate,” noted Brett Coburn, an attorney with Alston & Bird in Atlanta. “A quick shorthand for thinking about the regular rate is that it is derived by adding up all nonovertime payments made to an employee in a week and dividing it up by the number of hours actually worked in the week.”
McCutchen said it was necessary to update the types of compensation on which employers must pay overtime because the DOL last issued a rule on the regular rate in 1968, and many new employer benefits have emerged since then. Plaintiffs’ attorneys argue that the value of these benefits should be included in overtime calculations.
What’s Excluded from the Overtime Calculation
Before the DOL released its proposal, Alfred Robinson Jr., an attorney with Ogletree Deakins in Washington, D.C., noted, “The speculation is that the rulemaking will address whether the amount of a tuition reimbursement, the value of an employee discount or the cost of an employer-provided gym should be part of the regular rate.”
The proposed rule would exclude all of these from the regular rate, and in addition would exclude:
- The cost of providing wellness programs and onsite specialist treatment.
- Reimbursed expenses, including travel expenses that do not exceed the maximum travel reimbursement under the Federal Travel Regulation system.
- Accident, unemployment and legal services, which the DOL considers to be benefits plans.
Recently, some class-action lawsuits have alleged that employers violated the FLSA by failing to include the costs of perks, such as fitness club membership reimbursements, in the regular rate when calculating overtime, Washko noted.
Examples Provided for Bonuses
Simply calling a bonus discretionary does not mean it’s excluded from the regular rate of pay, the DOL noted in the proposed rule.
Most bonuses are nondiscretionary, said Ryan Glasgow, an attorney with Hunton Andrews Kurth in Richmond, Va., so most bonuses are included in the regular rate of pay. The proposed rule provides examples of the types of bonuses included or excluded from the overtime pay calculation.
To be excluded from the regular rate, the bonus must not be paid according to a contract or agreement. For example, any bonus that is promised to employees when they’re hired or is the result of collective bargaining would not be excluded.
Bonuses announced to employees to induce them to work more quickly or efficiently or remain with the organization are included in the overtime calculation. Most attendance bonuses and bonuses contingent on the worker staying with the organization until the payment is made must be included in the regular rate, the proposed rule states.
But spot bonuses and employee-of-the-month awards aren’t included, McCutchen observed.
The proposed rule hasn’t been finalized yet, but, Washko said, “HR should start evaluating its current compensation and benefit offerings to determine whether there may be opportunities to modify or expand those offerings in the next cycle, should the proposed rule go into effect.”