DOL Plans to Allow Employers to Exclude Certain Perks From Overtime Calculations

Author: Michael Cardman, XpertHR Legal Editor

March 28, 2019

The US Department of Labor (DOL) has proposed rules to update and clarify which forms of compensation must be included when calculating overtime pay under the Fair Labor Standards Act (FLSA).

The FLSA requires employers to pay nonexempt employees overtime pay of at least one and one-half times their regular rate for any hours worked in excess of 40 per workweek. The regular rate is defined as any and all remuneration for employment paid to, or on behalf of, an employee. This includes not just cash wages but most other forms of compensation such as meals and lodging, commissions, shift differentials, certain nondiscretionary bonuses, and more.

However, the FLSA statute and regulations allow employers to exclude from the regular rate certain forms of compensation such as paid time off, show-up or call-back pay where the employee is paid for hours not worked, and discretionary bonuses.

As the DOL observed, these rules were established more than 60 years ago when employees' compensation packages typically comprised cash wages; paid time off for holidays and vacations; and contributions to basic medical, life insurance, and disability benefits plans. Since then, the workplace and the law have changed, the DOL noted:

First, employee compensation packages, including employer-provided benefits and 'perks,' have evolved significantly. Many employers, for example, now offer various wellness benefits, such as fitness classes, nutrition classes, weight loss programs, smoking cessation programs, health risk assessments, vaccination clinics, stress reduction programs, and training or coaching to help employees meet their health goals.

Both law and practice concerning more traditional benefits, such as sick leave, have likewise evolved in the decades since the Department first promulgated [its overtime regulations]. For example, instead of providing separate paid time off for illness and vacation, many employers now combine these and other types of leave into paid time off plans.

In addition, many states and localities have passed laws that require employers to provide paid sick leave and impose penalties on employers that change employees' schedules without requisite notice, the DOL said.

Proposed Changes

In light of these modern compensation and benefits practices, the DOL has proposed updating its regulations to:

  • Clarify that the cost of providing wellness programs, onsite specialist treatment, exercise opportunities, employee discounts on retail goods and services, and certain tuition benefits may be excluded from an employee's regular rate of pay;
  • Clarify and provide examples of discretionary bonuses that may be excluded from an employee's regular rate of pay;
  • Eliminate the restriction that "call-back" pay and other payments similar to call-back pay must be "infrequent and sporadic" to be excluded from an employee's regular rate, while maintaining that such payments must not be so regular that they are essentially prearranged; and
  • Clarify that reimbursed expenses need not be incurred "solely" for the employer's benefit for the reimbursements to be excluded from an employee's regular rate of pay.

Next Steps

Employers will have 60 days from the time the proposed regulations are officially published in the Federal Register to comment. If the regulations are published on March 29, 2019, as expected, the comment period would close on May 28, 2019. Comments may be submitted online under Regulatory Information Number (RIN) 1235-AA24 or by mailing written submissions to:

Division of Regulations, Legislation and Interpretation

Wage and Hour Division, US Department of Labor, Room S-3502

200 Constitution Avenue, N.W.

Washington, DC 20210

Written submissions must include the name of the agency and the RIN 1235-AA24.

After the comment period ends, the DOL will respond to comments and possibly make revisions before publishing a final rule. This final rule will include a formal effective date.