New Rule: Defining the “Regular Rate” of Pay under FLSA

The U.S. Department of Labor (DOL) has issued a final rule that will take effect on January 15, 2020, with regards to what is considered the “regular rate” of pay for nonexempt employees with regards to the calculation of overtime in accordance with the Fair Labor Standards Act (FLSA).  Currently, the FLSA states that the “regular rate” for all nonexempt employees must include most nondiscretionary bonuses, shift differentials, on-call pay, and commissions, among other items, in the calculation of overtime.  Most employers were not sure if certain perks, e.g. gym memberships, longevity pay, parking benefits, etc. when paid for by the employer on behalf of an employee, had to be included in the “regular rate” of pay when calculating overtime, so the DOL has now defined what needs to be included and what does not.  The rule now clarifies that employers may exclude the following perks from the “regular rate” calculation:

• Unused paid leave, including paid sick leave and paid time off.
• Certain penalties employers must pay under state and local scheduling laws.
• Parking benefits, wellness programs, onsite specialist treatments, gym access and fitness classes, employee discounts on retail goods and services, certain tuition benefits, and adoption assistance.
• Business expense reimbursement for items such as cellphone plans, credentialing exam fees, organization membership dues and travel expenses that don’t exceed the maximum travel reimbursement under the Federal Travel Regulation system or the optional Internal Revenue Service (IRS) substantiation amounts for certain travel expenses.
• Certain sign-on and longevity bonuses.
• Complimentary office coffee and snacks.
• Discretionary bonuses (the DOL noted that the label given to a bonus doesn’t determine whether it is discretionary).
• Contributions to benefit plans for accidents, unemployment, legal services and other events that could cause a financial hardship or expense in the future.

The final rule did not change the definition of a nondiscretionary bonus or discretionary bonus.  A nondiscretionary bonus is defined as a bonus that is required to be paid based on certain criteria set forth in a contract or agreement.  Unlike a discretionary bonus, this bonus is to be paid on a routine basis, e.g. monthly, quarterly, etc. and is usually a set amount or percentage set forth in said contract or agreement.  On the other hand, a discretionary bonus is extra pay that an employer agrees to provide to an employee for a specific or in an unexpected situation. These cash payments are not part of the employee’s contract or agreement, and the employee should not expect to receive the bonus regularly as an entitlement.  The DOLs final rule now provides clearer guidelines as to what is considered to be a nondiscretionary bonus and what is not and in the same case what must then be included in the employee’s “regular rate” of pay with regards to the calculation of overtime in accordance with the FLSA. Municipal government employers who are reading this article should consider their municipality’s salary ordinance as a contract or an agreement with employees with regards to the payment of wages.

Employers who have an interest in how they should be including nondiscretionary bonus items in the employee’s “regular rate” of pay in order to correctly calculate the new overtime rate, in accordance with the FLSA, should refer to the electronic code of federal regulations – eCFR – Code of Federal Regulations, Title 5 – Chapter 1 – Subchapter B – Part 551 – Pay Administration Under the Fair Labor Standards Act, and specifically, 551.514 – Nondiscretionary Bonuses (page 28 of 34).

For additional information related to the “regular rate” of pay and the FLSA, please contact us at www.newfocushr.com.

Written by: Kristen Deutsch, M.B.A., CCP

President

                     12/16/2019