Department of Labor Proposes Updates and Clarifications to the Definition of “Regular Rate”

On March 28, 2019, the Department of Labor (DOL) released its newest proposed changes to the Fair Labor Standards Act (FLSA). These proposed updates would clarify the definition of “regular rate,” the amount of an employee’s pay that must be included when calculating overtime. Particularly the updates relate to the “exclusions,” the only parts of an employee’s compensation that an employer does not have to consider when calculating the regular rate.

These changes include:

• Clarification when unused paid leave, bona fide meal periods, reimbursements, benefit plans, and certain ancillary benefits may be excluded from the regular rate.
• That “call-back” pay only needs to “not be so regular that they are essentially prearranged” rather than “infrequent and sporadic” to be excluded from the regular rate.
• Clarification that the cost of providing wellness programs, onsite specialist treatment, exercise opportunities (including on and offsite gym access), employee discounts on retail goods and services, and certain tuition benefits may be excluded from an employee’s regular rate of pay.
• Updating the definition of an excludable discretionary bonus, including examples such as: employee of-the-month bonuses, bonuses to employees who made unique or extraordinary efforts which are not awarded according to pre-established criteria, severance bonuses, bonuses for overcoming stressful or difficult challenges, and other similar bonuses for which the fact and amount of payment at the sole discretion of the employer until at or near the end of the periods to which the bonuses correspond and that they are not paid “pursuant to any prior contract, agreement, or promise causing the employee to expect such payments regularly.”

Notably, the proposed changes do not include any exception for non-discretionary bonuses, such as commission, an agreement, or merit based plans that the employee has come to expect or other promised payments- this is an often missed area of compensation that can require calculation in overtime payments and is unlikely to be removed in any new regulations.

Due to the broad definition of “regular rate” and what compensation an employer must pay overtime on, all except for what is specifically excluded, confusion and costly litigation has arisen as employers struggle to provide employees with benefits and comply with regulations, as well as calculate the appropriate “regular rate” when paying overtime.

As employee compensation has evolved, the FLSA has struggled to keep up. In addition to an hourly rate or annual salary, many employers now offer an array of compensation and benefits such as commission, bonuses, leave, wellness plans, employee discounts, on-site meals and other “perks.” New state and local laws have also complicated matters, where they require pay for non-work such as paid sick leave and penalties for failing to require advance scheduling notices, as well as premium pay for the seventh day worked or working double shifts. The proposed clarifications are an effort to alleviate this confusion, encourage benefits and reduce litigation.

The proposal will be published in the Federal Register March 29. The public will have 60 days, or until May 28, to comment.  As with other recent proposed legislation, there will likely be a push to have the regulations finalized in the advance of elections.

For now, employers should be cognizant and cautious in calculating overtime and remember that ‘time and a half’ does not just include an employee’s hourly wage but all compensation unless otherwise excluded.

To learn more about the newest proposed changes to the Fair Labor Standards Act (FLSA), please contact Leah K. Sell. Leah is an Associate with Leech Tishman and a member of the firm’s Employment, Corporate, Litigation, Medical Cannabis and LaunchPad Start-Up Services Groups. Leah is based in Leech Tishman’s Pittsburgh office and can be reached at 412.261.1600 or via email at lsell@leechtishman.com.

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