On January 15, the DOL’s new regulations affecting the calculation of the “regular rate” of pay took effect, in an attempt to “provide clarity and to better reflect the 21st-century workplace.” In part one of our look at the changes, we looked at how the Department of Labor (DOL) clarified certain events that relate to employees’ work schedules. In part two, we examined some special types of pay and benefits and how the new regulations impact what employers have traditionally done. We also have a summary post, if you want a quick and dirty summary.
In this final part of the series, we will examine the three remaining changes: (1) Premium payments for hours of work on special days or in excess or outside of specified daily or weekly standard work periods; (2) Discretionary Bonuses; (3) So-called “similar payments” under the FLSA, which are a catch-all for payments an employer makes to an employee for purposes other than as compensation for his or her hours of employment; and (4) certain benefit plan payments.
To recap from part one, the phrase “regular rate” is a term of art, and can be the source of significant confusion. The regular rate does not include only the employee’s hourly wages (or salary, if the employee is a salaried, non-exempt employee). The FLSA defines the “regular rate” more broadly to include “all remuneration for employment paid to, or on behalf of, the employee,” except for certain enumerated types of payments. Under the FLSA, remuneration that employers must add to the regular rate includes not only commissions but also non-discretionary bonuses, shift differentials, hazard premiums and other incentive payments based on hours worked, production, or efficiency.
The FLSA (but maybe not applicable state law) specifically excludes, among other things, paid leave (vacation, PTO, sick leave, etc.); expenses incurred on an employer’s behalf; overtime premiums; Saturday/Sunday/holiday premiums; discretionary bonuses; and, more rarely, some gifts and payments on special occasions. Many of these categories have their own nuances, such as “discretionary” vs. “non-discretionary” bonuses or fringe benefits, too.
Clarification #6: Shift Differentials and Premium Payments
Many employers offer employees various types of payments for working on special days or at special times. For example, a recent CBA I negotiated included a $0.25/hour shift differential for third shift, and a 1.5x premium above the employee’s standard hourly rate after 12 hours worked in a day, regardless of whether the employee had worked more than 40 hours in the workweek. Former Section 207(e) of the FLSA permitted employers to exclude from the regular rate many of these types of payments when calculating an employee’s regular rate:
- For “hours worked in excess of eight in a day or in excess of the maximum workweek applicable to such employee [under Section 7(a)] or in excess of the employee’s normal working hours or regular working hours, as the case may be”;
- “[F]or work by the employee on Saturdays, Sundays, holidays, or regular days of rest, or on the sixth or seventh day of the workweek, where such premium rate is not less than one and one-half times the rate established in good faith for like work performed in non-overtime hours on other days”; or
- “[I]n pursuance of an applicable employment contract or collective-bargaining agreement, for work outside of the hours established in good faith by the contract or agreement as the basic, normal, or regular workday (not exceeding eight hours) or workweek . . . where such premium rate is not less than one and one-half times the rate established in good faith by the contract or agreement for like work performed during such workday or workweek.”
Additionally, Section 207 provides that extra compensation of the types described above is creditable toward overtime compensation owed pursuant to Section 7(a). These three types of compensation are unique in that they are the only types of compensation under the FLSA that are both (a) excludable from the regular rate AND (b) creditable toward overtime compensation (though my experience has been that employers typically elect not to take such credits).
The Final Rule replaces the terms “employment contracts” in Section 778.202 and “agreement of employment” in Section 778.205 with “written or unwritten employment contract, agreement, understanding, handbook, policy, or practice.” The DOL relaxed the explicit requirements for a contract to clarify its view that overtime premiums do not need to be made pursuant to a written contract or agreement to be excluded under these sections. Nonetheless, employers cannot pay this compensation willy nilly. The Final Rule’s more flexible provisions still require that employers must pay these types of compensation pursuant to some form of legitimate agreement or understanding.
Clarification #7: Discretionary Bonuses
Another frequent pitfall for employers has traditionally been bonuses. When paying a bonus, employers can generally exclude discretionary bonuses from the regular rate, and must include non-discretionary bonuses. The trick is determining which type of bonus you are paying. The FLSA regulations define discretionary bonuses as those where the employer has the sole discretion to determine both the fact and the amount of the bonus at or near the end of the period to which the bonus corresponds.
The Final Rule elaborates on the two types of bonuses in an attempt to give employers and employees “clarity.” In a new Section 778.211(d), the DOL reminds employers that the label applied to a bonus is not determinative, and lists some additional examples of potentially discretionary bonuses:
- Bonuses to employees who made unique or extraordinary efforts (including “spot bonuses”), provided that the employer does not award them according to a pre-established criteria;
- Severance bonuses;
- Referral bonuses for employees (for employees not primarily engaged in recruiting);
- Bonuses for overcoming challenging or stressful situations;
- Employee-of-the-month bonuses; and
- “Other similar compensation.”
In the Final Rule, the DOL declined to add additional examples, such as sign-on bonuses, gifts, or prizes, finding them adequately addressed by other provisions in the regulations. The additional examples may help avoid litigation over whether one of these payments falls into one of the various catch-all provisions, but probably will have minimal impact overall.
Clarification #8: “Other Similar Payments”
In addition to some of the categories we have discussed previously, Section 7(e)(2) of the FLSA excludes from the regular rate “other similar payments to an employee which are not made as compensation for his or her hours of employment.” Courts generally have held that the “other similar payments” exclusion applies to any compensation paid based on a person’s general status as an employee, as opposed to the quantity or quality of their work, and the Final Rule expressly codifies that definition, stating that such “other similar payments” must not “depend on hours worked, services rendered, job performance, or other criteria that depend on the quality or quality of the employee’s work.”
The Final Rule also clarifies that payments employers make to certain subclasses of workers, like discretionary bonuses to particular job titles/classes or locations, can still be excluded from the regular rate. This is a logical result, since those payments are not based on hours, quality, or quantity of work.
The Final Rule helpfully adds a broad range of illustrative examples of these “other similar payments” to the non-exhaustive list of excludable benefits in the regulations:
- Sums paid to an employee for the rental of his truck or car.
- Loans or advances made by the employer to the employee.
- The cost to the employer of conveniences furnished to the employee such as parking spaces and parking benefits; restrooms and lockers; on-the-job medical care; treatment provided on-site from specialists such as chiropractors, massage therapists, physical therapists, personal trainers, counselors, or Employee Assistance Programs; or gym access, gym memberships, fitness classes, and recreational facilities.
- The cost to the employer of providing wellness programs, such as health risk assessments, biometric screenings, vaccination clinics (including annual flu vaccinations), nutrition classes, weight loss programs, smoking cessation programs, stress reduction programs, exercise programs, coaching to help employees meet health goals, financial wellness programs or financial counseling, and mental health wellness programs.
- Discounts on employer-provided retail goods and services, and tuition benefits (whether paid to an employee, an education provider, or a student loan program).
- Adoption assistance (including financial assistance, legal services, or information and referral services).
The Final Rule does distinguish parking benefits from actual commuting cost payments, which must be included in the regular rate and makes clear that employers cannot exclude from the regular rate any such payments tied to the “employee’s hours worked, services rendered, or other conditions related to the quality or quantity of work” beyond setting initial waiting periods and including certain clawback provisions for misuse of benefits.
Regarding tuition benefits, the DOL’s comments in the Final Rule state that tuition benefits “must generally not be tied to hours worked, services rendered, job performance or other criteria linked to the quality or quantity of the employee’s work,” but that “[m]inimum employment requirements (e.g., requiring employees to be employed for six months prior to becoming eligible for tuition reimbursement) would be a permissible condition that would not affect the excludability of the tuition benefit from the regular rate.”
Clarification #9: Bona Fide Benefit Plan Contributions
Finally, the Final Rule clarifies the exclusion for benefit plan contributions. Section 7(e)(4) of the FLSA excludes from the regular rate “contributions irrevocably made by an employer to a trustee or third person pursuant to a bona fide plan for providing old-age, retirement, life, accident, or health insurance or similar benefits for employees.” To be excludable, though, “[t]he primary purpose of the plan must be to provide systematically for the payment of benefits to employees on account of death, disability, advanced age, retirement, illness, medical expenses, hospitalization, and the like.” The Final Rule adds some additional examples of common benefit plans used today and expands the scope of
In the Final Rule, the DOL adds more examples of the types of modern benefit plans that may be excludable from the regular rate of pay, such as “accident, unemployment, and legal services,” but makes clear that these additional examples would have to satisfy the other requirements outlined in Section 778.215.
The Final Rule expands the scope of § 778.215(b), which provides that when the IRS has approved a benefit plan or trust as satisfying the requirements of Section 401(a), 403(a), 403(b), 408(k), or 408(p) of the Internal Revenue Code, absent evidence to the contrary, the plan or trust will be considered to have met the corresponding conditions specified in the FLSA as well. The DOL’s Final Rule also addresses several other benefit plans in the Final Rule, including cafeteria plans, cash payments in lieu of plan participation, contributions to IRAs or HSAs, and discretionary contributions to retirement plans.
Most notably, the DOL declined to adopt requests from commenters to create a new presumption for employee benefit plans governed by and in compliance with ERISA. The DOL observed that compliance with ERISA alone does not address all requirements for excludability under Section 207(e)(4) of the FLSA and Section 778.215(a) of the regulations.
That’s quite a lot of detail, I know. The Final Rule did not make a ton of sweeping changes, but did include plenty of helpful clarifications, as we have seen. For those of you looking for the TL;DR version of our three-part series, see my summary post here.