Under the Fair Labor Standards Act (FLSA) and long-standing regulations, the regular rate of pay that is used in computing overtime pay includes more than just the employee’s base pay—it can include cash and non-cash bonuses and perks.
Determining which added payments and perks to consider in the overtime pay calculation can be confusing for employers. For this reason, the US Department of Labor (DOL) issued a final rule on December 12, 2019 that it believes better clarifies the definition of regular pay for overtime calculation purposes thereby making it easier for employers to identify perks that can be disregarded in connection with overtime pay.
The DOL states that this is the first significant update to the regulations governing the regular rate requirements in over 50 years.
The final rule was effective January 15, 2020.
Payments and perks excluded from the regular rate of pay for overtime pay purposes
The final regulations confirm the following may be excluded from an employee’s regular rate of pay for overtime pay purposes:
• 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; and clarifies 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 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
• contributions to benefit plans for accident, unemployment, legal services, or other events that could cause future financial hardship or expense.
Other changes in the final rule
The final regulations also include other changes to better streamline and simplify the overtime pay regulations as follows:
• Discretionary bonuses – The final regulations include an additional clarification that the label given a bonus does not determine whether it is discretionary and provides fact-based examples of discretionary bonuses that may be excluded from an employee’s regular rate of pay.
• Call-back pay – The final regulations eliminate the restriction that “call-back” pay and other payments similar to call-back pay must be “infrequent and sporadic” to be excludable from an employee’s regular rate, while maintaining that such payments must not be prearranged.
• Basic rate vs. regular rate – The regulations are updated such that the “basic rate,” which is authorized under section 7(g)(3) of the FLSA, can be an alternative to the regular rate under specific circumstances. Accordingly, employers using an authorized basic rate may exclude from the overtime computation any additional payment that would not increase total overtime compensation by more than 40% of the higher of the applicable local, state, or federal minimum wage a week on average for the overtime workweeks in which the employer makes the payment.
Following is more information concerning these final regulations are available from DOL
• Final Rule: Regular Rate under the Fair Labor Standards Act
• Fact Sheet: Final Rule to Update the Regulations Governing the Regular Rate under the FLSA
• Highlights of the Final Rule on Regular Rate Under the Fair Labor Standards Act
• Press Release [12/12/19]: Department of Labor Issues Final Rule to Update the FLSA’s Regular Rate Regulations