Calculating the Regular Rate of Pay

By: Jaymen Chavda

Summary

Employers now have more clarity and flexibility about which perks they can include in workers' "regular rate" of pay, which is used to calculate overtime premiums under the Fair Labor Standards Act (FLSA). The U.S. Department of Labor (DOL) announced a final rule that will take effect Jan. 15, 2020.

The rule marks the first significant update to the regulations governing regular rate requirements under the Fair Labor Standards Act (FLSA) in over 50 years. Here's how the new law will impact employers.

Why is this happening?

The previous regulatory landscape left employers uncertain about the role that perks and benefits play when calculating the regular rate of pay.  The calculation of an employee’s regular rate of pay is important because, under the Fair Labor Standards Act, banks and other employers must pay an employee 1.5 times the employee’s regular rate of pay for any hours in excess of 40 hours that the employee works in a workweek, unless that employee is exempt from overtime requirements.

An employee’s regular rate of pay may differ from the employee’s hourly rate of pay because the regular rate includes certain payments and benefits provided to the employee. The new rule clarifies which perks and benefits must be included in the regular rate of pay, as well as which perks and benefits an employer may provide without including them in the regular rate of pay.

What is the impact on employers?

The Department clarifies the regulations to confirm that 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 accident, unemployment, legal services, or other events that could cause future financial hardship or expense.

As a result, employers may provide these benefits to non-exempt employees without the concern that the regular rate should account for these benefits and thereby potentially making the overtime rate of pay incorrect and too low.

While the Final Rule provides helpful clarification regarding the regular rate, employers should remain thoughtful when excluding bonus amounts from the regular rate. “Discretionary” bonuses may be excluded, but labelling a bonus as discretionary, alone, cannot support excluding it from the regular rate. The Final Rule provides examples of the types of bonuses that can be excluded as discretionary, but this determination remains very fact-specific and the standard for excluding a bonus from the regular rate remains high

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The Final Rule is effective January 15, 2020. Please feel free to reach out to us for more information and/or to subscribe to our newsletter, please email us at info@chugh.com or schedule a consultation with our team. We also encourage you to share our alerts with your contacts who might benefit.