U.S. Department of Labor's Updated Regulations Clarify Exclusions From the Regular Rate

January 31, 2020

The U.S. Department of Labor ("DOL") recently issued updated regulations which clarify what types of compensation provided by employers can properly be excluded from the regular rate for overtime computation purposes. The DOL's stated purpose in updating its regular rate regulations (which had not been significantly revised in more than 50 years) is to better reflect the 21st century workplace and to encourage employers to provide additional and innovative benefits to employees without fear that those forms of compensation might result in additional overtime obligations. The updated regulations became effective on January 15, 2020.

In general, employers are required to pay non-exempt employees one and one-half times the regular rate of pay for hours worked in excess of 40 in a work week. Under the framework of the Fair Labor Standards Act ("FLSA") and the DOL's regulations, remuneration paid by an employer to an employee is presumed to be included in the regular rate unless it falls within one of eight statutory exclusions:

sums paid as gifts or payments in the nature of gifts made at Christmas time or on other special occasions, as long as the amounts of the gifts are not measured by or dependent on hours worked, production, or efficiency;
payments made for occasional periods when no work is performed due to vacation, holiday, illness, failure of the employer to provide sufficient work, or other similar cause, reimbursement for expenses, and other similar payments which are not made as compensation for hours of employment;
discretionary bonuses or payments made pursuant to a bona fide profit-sharing plan, as long as the payments are determined without regard to hours of work, production, or efficiency;
contributions irrevocably made by an employer to a trustee or third person pursuant to a bona fide retirement or health insurance plan or similar benefits;
extra compensation provided for working in excess of eight hours in a day or 40 hours in a week or in excess of the employee's regular work hours;
extra compensation for working on Saturdays, Sundays, holidays, or other special days, as long as the premium is at least one and one-half times the regular rate;
extra compensation pursuant to an employment contract or collective bargaining agreement for working outside of the hours established by the contract or collective bargaining agreement, as long as the premium is at least one and one-half times the regular rate; and
income derived from certain types of stock option, stock appreciation, or bona fide stock purchase programs.

The DOL's recent updates to its regulations confirm that the following types of compensation and benefits can be excluded from the regular rate:

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, and adoption assistance;
payments for foregoing holidays and other forms of paid time off;
show-up or reporting pay required under state and local laws (for example, the requirement under New York law to pay four hours at minimum wage if an employee reports to work at the request of the employer);
reimbursed expenses, even if not incurred solely for the employer's benefit, such as cell phone plans, credentialing exam fees, and organization membership dues;
certain types of signing bonuses and longevity bonuses;
the cost of office coffee and snacks provided to employees as gifts; and
contributions to benefit plans for accident, unemployment, legal services, or other events that could cause future financial hardship or expense.

The determination of what compensation should be included in the regular rate for overtime computation purposes is a critical one. An employer's failure to include all required forms of compensation in the regular rate could result in underpayment of overtime, which could lead to liability not just for the amount of the underpayment but also potential liquidated damages, interest, and attorneys' fees incurred by a plaintiff. A systemic failure to include all required forms of compensation in the regular rate for a group of employees could result in collective action litigation.

The promulgation of the DOL's updated regulations on regular rate exclusions would be an ideal time for employers to review all potential forms of compensation and benefits paid to or on behalf of employees and make sure that any exclusions can be justified under the FLSA and the DOL's regulations. Employers should consult with their labor and employment counsel if there are any questions about whether a particular type of remuneration or benefit may permissibly be excluded from the regular rate.

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