Forthcoming Changes to Clarify What Is and Is Not Included in the FLSA Regular Rate

In March of this year, the United States Department of Labor (“DOL”) issued the first proposed rule within half a century that would amend the way overtime is calculated under the Fair Labor Standards Act (“FLSA”). Facially simple but devious in the details, nearly every employer is familiar with the FLSA’s “regular rate” used to calculate the overtime rate of pay.

The “regular rate” is undefined in the FLSA but has been described by the U.S. Supreme Court as “a matter of mathematical computation,” and the DOL’s regulations have long been the guide for employers to discern the correct regular rate. But the regulations do not address every possible form of remuneration an employee may receive, and as every employment litigator knows, even a simple oversight with respect to the application of the regular rate can leave an employer facing a collective action lawsuit.

The proposed rules first aim to clarify the regular rate by expressly excluding the following forms of compensation:

  • Payments for unused paid leave, including sick leave;
  • Reimbursed expenses even if not incurred “solely” for the employer’s benefit;
  • Certain reimbursed travel expenses;
  • Benefit plans such as accident, unemployment, and legal services plans;
  • Payments for employee wellness programs, gym memberships, and fitness classes;
  • Employee discounts on retail goods and services; and
  • Tuition reimbursement programs.

In the absence of the proposed rules, whether the above forms of compensation are excluded from the regular rate largely depends on the circumstances surrounding the compensation. For example, whether a tuition reimbursement payment is currently included in the regular rate depends on whether the payment is for the benefit of the employer, which may not always be clear when the employee obviously receives a benefit by virtue of the payment.

The proposed rules would also offer several new examples of discretionary bonuses that may be excluded from the regular rate, including employee-of-the-month bonuses, bonuses for unique or extraordinary efforts not set by pre-established criteria, severance bonuses, and bonuses for overcoming stressful or difficult challenges, in addition to other types of bonuses proposed by public comment. Bonuses have proven to be notoriously difficult to analyze with any certainty under the current regulations.

The underlying purpose of these proposed changes is not only to add clarity to the governing rules, but to encourage employers to expand their benefits offerings to employees. If adopted in substantially similar form, the proposed changes would accomplish this latter goal in two ways. First, excluding the identified employee benefits from inclusion in the regular rate would directly reduce the expense of offering such benefits. Second, by clearly indicating that such benefits are excluded, employers save the administrative costs of considering the treatment of such benefits under the FLSA and then tracking them for compensation purposes.

The Bottom Line for Employers

Regardless of whether the proposed rules are adopted in identical format, any adopted rules will likely reduce confusion as well as maintain the same theme of encouraging expansion of employee benefits by eliminating them as a form of compensation that must be included in the regular rate. While it remains to be seen whether the rules as adopted will encourage widespread expansion of employee benefits as suggested by the DOL, the rules will nevertheless benefit employers by providing administrative convenience. No longer will employers have to weigh the factual circumstances for a given type of payment to determine whether it should be included in the regular rate calculation. Beyond administrative convenience, this certainty also allows employers to avoid becoming entangled in costly disputes and litigation over whether their interpretation of the factual circumstances surrounding their payments to employees was legally correct. Ultimately, employers should welcome any clarity from the DOL in this regard and reevaluate their treatment of payments to employees based on the rules upon adoption.

*Note that the public comment period closed on June 12, 2019, and the DOL typically takes a few months to consider the comments. Until the final rules are adopted, employers must continue to follow the current rules. Employers should also review the final rules upon adoption to confirm which employee benefits are excluded from the regular rate.