New FLSA Opinion Letters Address Regular Rate of Pay
Author: Michael Cardman, XpertHR Legal Editor
April 1, 2020
The Fair Labor Standards Act (FLSA) requires employers to pay for overtime hours at one and one-half times their employees' regular rate of pay. This regular rate includes not just any hourly wages, but also other forms of compensation such as commissions or nondiscretionary bonuses.
With a few exceptions, all compensation paid to employees must be included when calculating their regular rate of pay.
The US Department of Labor (DOL) has issued new opinion letters that address whether the following payments fall under those exceptions:
An opinion letter is an official, written opinion from the DOL's Wage and Hour Division (WHD) describing how a particular law applies to specific circumstances. If an employer requests an opinion letter from the WHD, provides the agency with all the pertinent facts regarding its particular situation, receives an opinion letter from the WHD and then follows the opinion letter in good faith, it will be shielded from liability for any minimum wage and/or overtime violations involving the practices described in its letter.
Even if they had not requested an opinion letter themselves, other employers that have identical fact patterns also can be shielded from liability if they follow an opinion letter. However, an employer should exercise caution before relying on another employer's opinion letter because any variation in the fact pattern can nullify its defense.
Opinion letter FLSA2020-3 addresses a city government that operates under a resolution stating that "All eligible employees ... shall be entitled to receive an incentive award in the form of longevity award" (emphasis added). Employees are eligible if they work full time for at least five years, and they receive $2 per month for each whole year of their tenure. Currently, the longevity award is paid every two weeks, but the city is contemplating paying it out in a lump sum each year around Christmas time.
One of the regular rate exclusions covers "payments in the nature of gifts made at Christmas time or on other special occasions, as a reward for service, the amounts of which are not measured by or dependent on hours worked, production, or efficiency."
Because the city's resolution uses the word shall, it does not provide the city the discretion to deny employees the full amount of the longevity award, the DOL said. Therefore, the payments are not "payments in the nature of gifts" and must be included in the regular rate when calculating overtime.
However, the DOL said the payments could be excluded if the city were to change the word shall to may, because the payments are not measured by or dependent on hours worked, production or efficiency.
Opinion letter FLSA2020-4 addresses a program under which a referral bonus would be paid in two installments:
- The first installment would be paid to the referring employee when the employer hires the referred employee; and
- The second installment would be paid to the referring employee on the one-year employment anniversary of the referred employee, as long as the referring employee is still actively employed.
The DOL said the first installment could be excluded from the regular rate of pay. Because participation in the program is voluntary, does not take a significant amount of time and requires employees only to participate in conversations as part of their social lives outside of normal working hours, the first installment qualifies as a payment in the nature of a gift, as described above.
However, the DOL said the second installment must be factored into the regular rate of pay because it is contingent on the referring employee remaining with the employer for a year after the date the referred employee is hired.
Group Term-Life Insurance Contributions
Opinion letter FLSA2020-5 addresses an employer that contributes to employees' group-term life insurance coverage of more than $50,000.
These payments are considered part of an employee's taxable gross income under the federal tax code, so the employer asked if they also must be considered part of the regular rate of pay.
The DOL said they should not, because they qualify as "contributions irrevocably made by an employer pursuant to a bona fide benefit plan," which are among the exclusions from the regular rate of pay.