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U.S. Department of Labor Announces Proposed Update to Regulations Governing Overtime Calculation

Apr 03, 2019
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A few weeks after previewing its new proposed white-collar overtime rule, the U.S. Department of Labor (“DOL”) announced another proposed rule, this time updating and adding some much-needed clarification to the regulations governing the calculation of what’s known as the regular rate of pay under the Fair Labor Standards Act (“FLSA”). The proposed rule is the first update to these regulations in more than 50 years.

Pursuant to the FLSA, employers are required to pay overtime to non-exempt employees at a rate of one and one-half times their “regular rate” of pay for hours worked over 40 in one workweek. The FLSA defines an employee’s “regular rate” to include “all remuneration for employment paid to, or on behalf of, the employee.” This definition is, however, subject to certain exceptions, which are outlined in the statue and interpreted by the current regulations.

In issuing the proposed regulations, the DOL acknowledged that the interpretations set forth in the current regulations discourage employers “from offering more perks to their employees as it may be unclear whether those perks must be included in the calculation of an employees’ (sic) regular rate of pay.” The DOL stated that it hopes that the proposed rule will clarify which types of compensation must be included in the “regular rate.”

The proposed rule will permit employers to exclude the following from that calculation:

  • the employer’s cost of providing wellness programs, onsite specialist treatment, gym access and fitness classes, and the value of employee discounts on retail goods and services;
  • payments for unused paid leave, including paid sick leave;
  • reimbursed expenses, even if not incurred “solely” for the employer’s benefit;
  • reimbursed travel expenses that do not exceed the maximum travel reimbursement under the Federal Travel Regulation System and that satisfy other regulatory requirements;
  • discretionary bonuses, by providing additional examples and clarifying that the label given a bonus does not determine whether it is discretionary;
  • contributions made by an employer to benefit plans, including accident, unemployment, and legal services; and
  • tuition programs, such as reimbursement programs or repayment of educational debt.

The proposed rule also includes clarification regarding the circumstances under which “show-up” and “call-back” pay must be included in the regular rate calculation. Of course, hours actually worked for a “show-up” or “call-back” scenario must be compensated; however, amounts in addition to what the employee would receive for hours actually worked are excludable. The DOL has proposed adjusting the circumstantial requirement that such payments be “infrequent and sporadic” in order to be excluded from the “regular rate” calculation. Instead, the DOL has specified that such payments “must not be so regular that they are essentially prearranged.” For example, if an employer retailer called in an employee to help clean up the store for 3 hours after an unexpected roof leak, and then again 3 weeks later for 2 hours to cover for a coworker who left work for a family emergency, payments made in addition to the time for hours worked would be excludable from the regular rate calculation. In contrast, if an employer restaurant called in an employee server for two hours of supposedly emergency help during the busiest part of Saturday evening for 6 weeks out of 2 months in a row, that would be essentially prearranged, and all of the call-back pay would need to be included in the regular rate.

One final highlight of the proposed rule is its correction of an inconsistency in the regulations regarding the excludability of payments for bona fide meal periods from regular rate calculations. Due to inconsistent wording in the regulations (§§ 778.218 and 778.320), there was some uncertainty with respect to whether a bona fide meal period (i.e., time where no work is performed but the employee is still compensated for such time) is excludable from the regular rate calculation. While the DOL clarified its position that such time is excludable in an opinion letter more than 20 years ago, the proposed rule would codify the DOL’s interpretation, thereby removing any ambiguity or confusion.

The proposed rule provides some welcomed clarification to employers that may have been holding back on offering additional perks to employees in order to avoid increased overtime liability. The proposed rule is currently in a period of notice and comment, which will close on May 28, 2019. The DOL has encouraged any interested members of the public to submit comments about the proposed rule electronically online (rulemaking docket RIN 1235-AA24).

K|W|W will continue to share updates on the status of the proposed rule, and provide employers with advice regarding how to comply with any changes that may be required once the new rule becomes final. If you have any questions, please feel free to contact Katie Basch, Amanda Smith, or any other K|W|W attorney.

For additional information regarding the DOL’s new proposed rules, as well as other FLSA-related compliance issues facing employers, sign up for our May 9, 2019 Rise & Learn session titled “Protecting Your Business from the ‘Uptick’ in Wage/Hour Lawsuits.”