The Department of Labor Updates Its Definition of “Regular Rate of Pay” under the Labor Standards Act

The U.S. Department of Labor (“DOL”) issued its final rule, effective January 15, 2020, updating the requirements for calculating the regular rate of pay under the Fair Labor Standards Act (“FLSA”). This is the first significant update to the FLSA in over 50 years. Specifically, in this final rule, the DOL defines what forms of payment employers should include and exclude in calculating an employee’s regular rate of pay in order to determine the employee’s “time and one-half” when calculating overtime rates.

Why the change? Employee compensation packages, including employer-provided benefits and “perks,” have expanded significantly. In 1950, the Bureau of Labor Statistics estimated that fringe benefits comprised only 5 percent of employees' total compensation.Today, such benefits make up approximately one-third of employees’ total compensation.Many employers, also now offer various wellness benefits or perks, such as fitness classes, nutrition classes, weight loss programs, smoking cessation programs, health risk assessments, vaccination clinics, stress reduction programs, and training or coaching to help employees meet their health goals.

Also, both law and practice concerning more traditional benefits, such as sick leave, have likewise evolved in the decades since the DOL first promulgated the FLSA. For example, instead of providing separate paid time off for illness and vacation, many employers now combine these and other types of leave into paid-time-off plans. Moreover, in recent years, a number of state and local governments have passed laws requiring employers to provide paid sick leave. In 2011, for example, Connecticut became the first state to require private-sector employers to provide paid sick leave to their employees. Today, several states, the District of Columbia,and various cities and countiesrequire paid sick leave, and many other states are considering similar requirements.

In the ever-evolving climate of employee compensation packages, the DOL’s final rule sets forth regulations to confirm that employers may exclude the following 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, while also clarifying 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 given 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.

If your company has questions about the DOL’s final rule or any other issue regarding employment matters, contact one of Barrett McNagny’s labor and employment attorneys.

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