On December 16, 2019, the United States Department of Labor’s Wage and Hour Division (“WHD”) published in the Federal Register a Final Rule updating the Fair Labor Standards Act (“FLSA”) regulations that govern, among other things, whether certain types of pay and benefits constitute part of a non-exempt employee’s regular rate of pay for purposes of calculating overtime under federal law. Under section 7(e) of the FLSA, an employee’s regular rate for any given workweek “shall be deemed to include all remuneration for employment paid to, or on behalf of the employee, but shall not be deemed to include” pay or benefits falling within eight enumerated exclusions.
WHD originally issued regulations interpreting section 7(e) in 1968, located at subparts C and D of 29 C.F.R. part 778, with minor revisions following in 1971, 1981, and 2011. On March 29 of this year, WHD issued a Notice of Proposed Rulemaking identifying further regulatory changes under consideration. This proposal largely flew under the radar, drawing only 86 comments from the public. (By way of comparison, the recent proposal to update the salary threshold for the executive, administrative, and professional exemptions generated more than 116,000 public comments.) The new standards set forth in the Final Rule go into effect on January 15, 2020, which represents a relatively speedy 292 days for a rule to progress from initial proposal to becoming binding law.
While the Final Rule is dense and worth a close read primarily by individuals tasked with designing and implementing compensation, benefits, and payroll, some of the more notable changes clarify that the following items need not factor into the regular rate, as described by the Department’s press release:
- 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; and 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.
Where these regulatory changes broaden the categories of pay and benefits that may fall outside of the regular rate, employers should consider waiting until the effective date before relying on the new standards. In addition, while most states follow federal regular rate principles, it is important to review state law to ensure that compliance with these revised regulations does not lead to difficulty under state overtime law.