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DOL Proposed Rule Clarifies Regular Rate Exclusions from Overtime Pay

The past year has brought a whirlwind of regulatory activity from the U.S. Department of Labor (“DOL”). On the heels of eliminating the 80/20 tip credit rule and releasing a long-awaited update on overtime exemptions, the DOL has yet again come out with new proposed guidance that may bring changes to employee compensation.

In March 2019, the DOL announced a proposed rule to clarify what types of compensation may be excluded from an employee’s “regular rate” for overtime pay. Under the federal Fair Labor Standards Act (FLSA), non-exempt employees are required to be paid 1.5 times their “regular rate” for all hours worked over 40 in a workweek. The “regular rate” includes more than just an employee’s straight hourly pay. Employers must also include the monetary value of other compensation given to employees such as non-discretionary bonuses, shift differentials, and commissions. Because these payments must be included when calculating the regular rate, an employee’s regular rate may be a higher number than their straight hourly pay. The higher an employee’s regular rate is, the more overtime compensation an employee receives.

Employers have long been confused over whether the monetary value of certain employee benefits and other office perks should be included in an employees’ regular rate under the FLSA, which has not been updated since 1968. Businesses have faced lawsuits from employees claiming they should have paid overtime on the value of employee discounts and other benefits. The DOL’s proposed rule states that “[u]nder current rules, employers are discouraged from offering more perks to their employees as it may be unclear whether those perks must be included in the calculation of an employees’ regular rate of pay.”

To remedy this confusion, the DOL released a proposed rule on March 28, 2019 to clarify that the value of the following benefits may be excluded from an employee’s regular rate when calculating overtime pay:

  • Wellness benefits, including gym memberships, fitness classes, and on-site specialist treatment;
  • Employee discounts on retail goods and services;
  • Payouts to employees for unused paid vacation and paid sick leave;
  • Discretionary bonuses;
  • Travel reimbursements that do not exceed the maximum travel reimbursement permitted under the Federal Travel Regulation System regulations and satisfy other regulatory requirements;
  • Reimbursed expenses, even if not incurred “solely” for the employer’s benefit;
  • Benefit plans, including accident, unemployment, and legal services benefits; and
  • Tuition reimbursement and repayment of student loans.

By clarifying that these types of compensation may be excluded from the regular rate, the DOL hopes employers will not be discouraged from providing such workplace benefits. If the DOL’s proposed rule is adopted, employers could provide these popular office perks to employees without worrying whether the value of such benefits should be included in an employee’s regular rate for overtime pay. The proposed rule also clarifies that payments for hours not worked, such as bona fide meal periods and certain types of “call-back” pay, are also excludable from the regular rate. The DOL’s notice of proposed rulemaking may be found here.

Employers who are interested in these regular rate exclusions must keep in mind that the DOL’s proposed rule is not yet final. The DOL may revise the proposal before publishing its final rule. The public comment period for the proposed rule ended on June 12, 2019. Now that the public comment period is over, the publication of the final rule could occur at any time and may include changes from the proposed rule.

Business professionals seeking to review their company’s overtime policies and payroll practices in light of this development should consult with legal counsel to ensure continued compliance with all federal and state wage and hour regulations.

DISCLAIMER: The information provided is for general informational purposes only. This post is not updated to account for changes in the law and should not be considered tax or legal advice. This article is not intended to create an attorney-client relationship. You should consult with legal and/or financial advisors for legal and tax advice tailored to your specific circumstances.

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