Payments From Third Parties Must Be Included in Overtime Only If Employee Agreed, 3rd Circuit Rules
Author: Michael Cardman, XpertHR Legal Editor
August 26, 2019
Under the Fair Labor Standards Act (FLSA), the regular rate of pay on which overtime is based must include "all remuneration for employment" (with certain exceptions).
But what about payments from third parties to employees?
In a case of first impression, the 3rd Circuit Court of Appeals ruled that a third-party payment qualifies as remuneration for employment only when the employer and employee have effectively agreed it will.
The case, Sec'y United States DOL v. Bristol Excavating, Inc., involved a large natural gas production company, Talisman Energy, which paid bonuses to the employees of a small contractor, Bristol Excavating, for safety, efficiency and completion of work.
During a routine inspection, the US Department of Labor (DOL) determined that the Talisman-paid bonuses must be included in the Bristol employees' regular rate of pay and ordered Bristol pay for overtime at a higher rate. When Bristol refused, the DOL filed a lawsuit alleging that Bristol had violated the FLSA's overtime provisions.
Citing three of its own opinion letters and a 2017 district court ruling, the DOL argued that any compensation for performing work should qualify as remuneration for employment, regardless of whether the payment is provided by a third party or whether there is an agreement between the employer and employee about which payments the employee will regularly receive.
But the 3rd Circuit was not persuaded, stating:
First of all, the Department has enforced the FLSA for a very long time, yet it can only point to a single unreported district court opinion indicating that an incentive bonus from a third party could be included in employees' remuneration for employment. ... The near total absence of other authority is alone telling. If, in eight decades, no court has said what the Department of Labor now asserts is the meaning of the statute, that interpretation is probably unsupported because it is unsupportable.
Whether an employer and its employees have reached an implicit agreement that third-party bonuses are "remuneration for employment" is "a question that does not lend itself to an easy, bright-line test," the court observed. However, the court outlined three threshold factors:
- Whether the specific requirements for receiving the payment are known by the employees in advance of their performing the relevant work;
- Whether the payment itself is for a reasonably specific amount; and
- Whether the employer's facilitation of the payment is significantly more than serving as a pass through vehicle.
If the answer to all of those questions is yes, there should then be a holistic assessment of the level of the employer's involvement in the third-party bonus program, the 3rd Circuit held.
The Bristol ruling sets an important precedent for employers operating in Delaware, New Jersey, and Pennsylvania. Employers based elsewhere should proceed with caution before excluding third-party payments from overtime calculations since the Bristol ruling conflicts with the DOL's position.