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U.S. DOL Updates FLSA Regular Rate of Pay for Overtime Calculation Purposes

January 9, 2020

By Anthony Kaylin, courtesy of SBAM Approved Partner ASE

In a highly technical environment, a major issue that has gained momentum in the growing wage and hour lawsuits is the determination of base pay wage rate for calculating overtime.  The question is what needs to be included and what can be excluded for the overtime pay base wage rate. The new rule, which was published on December 16, 2019, will be effective as of 1/15/2020 and HR needs to be prepared for the updated calculations.

Generally, there are eight categories of pay that can be excluded from overtime pay.  These include

1.      Gifts and payments on special occasions

2.      Payments made for occasional periods when no work is performed such as vacation or sick pay, reimbursements for work-related expenses, and other similar payments that are not compensation for hours of employment

3.      Discretionary bonuses, payments to profit-sharing, thrift, or savings plans that meet certain requirements, and certain talent fees

4.      Contributions to a bona fide plan for retirement, or life, accident, or health insurance, or similar

5.      Extra compensation provided by a premium rate for certain hours worked in excess of eight in a day, 40 hours in a workweek, or the employee’s normal working hours

6.      Extra compensation provided by a premium rate for work on Saturdays, Sundays, regular days of rest, or the sixth or seventh days of the workweek

7.      Extra compensation provided by a premium rate pursuant to an employment contract or collective bargaining agreement for work outside of the hours established therein as the normal workday (not exceeding eight hours) or workweek (not exceeding 40 hours)

8.      Income derived from a stock option, stock appreciation right, or employee stock purchase plan

The new rule continues with these exceptions but clarifies a variety of payments that employees today may receive that wasn’t considered in the past.  For example, all forms of unused leave will now be treated the same for determining whether the sums paid are excluded from the regular rate.  Previously it was only considered for holiday and vacation pay.  With more employers using PTO, substance over form will prevail.  The final rule acknowledges “paid time off” and clarifies that the Department will treat all such time consistently with respect to whether it should be included in the regular rate.

The following discusses various changes that may impact how employers calculate rate of pay:

  • The final rule eliminates the reference to lunch breaks and states that pay received for a bona fide meal break period does not convert such time to hours worked, unless there is an agreement or past practice of doing so.  

  • The final rule also covers reimbursable expenses and changes the regulation by taking out the word “solely.”  The regulation will not read “where an employee incurs expenses on his employer’s behalf or where he is required to expend sums solely by reason of action taken for the convenience of his employer.”  This includes cell phone plans, credentialing exam fees, organization membership dues, and travel, even if not incurred “solely” for the employer’s benefit.

  • Given the new types of specialists and what is provided in wellness programs, exclusions from the regular rate now include onsite “specialist treatments” (such as chiropractors, massage therapists, personal trainers, and EAP visits); gym access/memberships; employee wellness programs; employee discounts on retail goods; and tuition reimbursement.

  • If childcare payments are provided by an employer, routinely-provided childcare” must be included in the regular rate.  Emergency childcare services — if those services are not provided as compensation for hours of employment and are not tied to the quantity or quality of work performed — may be excluded.

  • Regular rate does not include contributions to benefit plans for accident, unemployment, legal services, or other events that could cause future financial hardship or expense.

  •  “Show-up pay” where the employee goes to work but then is sent home is excluded from the applicable wage rate.  The final rule also clarifies that new state and local laws that require “reporting pay” (i.e., pay for employees whose employer subtracted hours from a regular shift before or after the employee reports to duty) will be treated as “show-up” pay under existing regulations.

  • “Call-back pay” is a situation in which the employee completes their regular shift but is subsequently called back to work.  Some jurisdictions require payment for the call back pay, maybe up to four hours of work regardless if the employee works less hours on the call back.  As long as this call back is not “so regular that they are essentially prearranged,” these payments also are excluded.

  •  “Predictability pay” may be required by some jurisdictions when schedules are changed at last moment.  These payments are also not included in the wage rate.

  • Bonuses cannot be just identified as discretionary but must be optional in nature.  The new rules describe excludable discretionary bonuses: employee-of-the-month bonuses; bonuses to employees who made unique or extraordinary efforts; severance bonuses; and bonuses for overcoming challenging or stressful contributions.

The list goes on.

Given the changes in the final regulations, employers should, with legal counsel, audit their pay practices to ensure that payments made and that were excluded in the past are still proper to exclude today.  State laws may add to the confusion of what should be paid, in that these laws may provide greater rights than the federal law.  Given the fact that the Fair Labor Standards Act provides for lawyer fees when employers are caught making mistakes, regardless of intent, HR needs to be diligent to assure that all that is required in the overtime wage rate is appropriate and proper.

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