By Andrew Adams
For the first time in over 50 years, the U.S. Department of Labor (DOL) updated the “regular rate” rule. In case you need a refresher, an employee’s regular rate is the rate an employer must use when calculating overtime payments. This is usually done by dividing the total pay for employment in any workweek by the total number of hours actually worked. Total pay includes all payments an employer makes to, or on behalf of, an employee, including payments such as shift differential, nondiscretionary bonuses, promotional bonuses and cost-of-living adjustments.
Once calculated, the regular rate is then used as the base for overtime payment calculations. If that wasn’t confusing enough, the regulation itself hasn’t been updated in over 50 years and provided little clarity in today’s modern workplace.
Once in a Generation
The last time the DOL amended its rule on the regular rate, the average household income in the United States was $3,100, and within a decade 40 percent of Americans in the private sector were covered by a pension plan. Pension plans proved to be far too costly for employers in the long run, covering only 18 percent of private-sector workers by 2011.
With the downfall of the private-sector pension, employers had to look outside the box to attract new workers and turned to perks such as gym memberships, student loan repayment programs, and free lunches. Despite the widespread inclusion of these new perks and the evolving nature of employee benefits in general, the DOL had failed to keep pace. The old rule simply did not contemplate a world where tuition benefits and cellphone reimbursement could even exist; leaving employers with little guidance on what effect the benefits they were offering would have on overtime calculations.
The DOL Makes a Move
In the absence of clarification from the DOL, employees took to litigating their regular rate disputes, leading to combined litigation costs of approximately $28.1 million per year. The DOL recognized that “[t]he previous regulatory landscape left employers uncertain about the role that perks and benefits play when calculating the regular rate of pay.”
The new rule aims to clarify which benefits and perks must be included in an employee’s regular rate and those that an employer can offer without worrying about whether it needs to be included.
Under the new rule employers may exclude the following from an employee’s regular rate of pay:
- 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, and;
- contributions to benefit plans for an accident, unemployment, legal services, or other events that could cause future financial hardship or expense.
Your Bottom Line
The takeaway for employers is that the DOL has now clarified which benefits and perks they intend to be a part of the regular rate and those that they do not. The Final Rule was published on December 16, 2019, and will be effective on January 15, 2020. We will continue to update employers as additional guidance is made available by the DOL, and our attorneys are available to answer any questions you may have about how the final regulations may apply to your workforce.