Labor Department Clears the Way for Employee Perks

Employees appreciate employee discounts, tuition reimbursement, prizes of small value, and wellness benefits. But those perks had been put in danger in recent years by lawsuits claiming that employers should have paid overtime on their value. On December 12, 2019, the U.S. Department of Labor saved these and other welcomed extras by issuing revised regulations clarifying when employers need not pay overtime on perks.

The final rule revises the regulations at 29 CFR Part 778 to clarify and update the “regular rate” requirements under section 7(e) of the Fair Labor Standards Act (FLSA), 29 USC §207(e), focusing on the types of compensation that employers must include in the overtime calculation.

Background on Regular Rate

The FLSA requires that employers pay non-exempt employees overtime at 1.5 times their regular rate for all hours worked over 40 in a workweek. The regular rate is not just an employee’s hourly rate of pay, but rather includes “all remuneration for employment” unless specifically excluded by section 7(e) of the FLSA.

Examples of types of pay that must be included in the regular rate in addition to base hourly wages include non-discretionary bonuses, commissions and shift differentials. Because these types of compensation are included in the regular rate, employers pay overtime on them when non-exempt employees work over 40 hours in a week.

The FLSA excludes some types of compensation from the regular rate, such as vacation or holiday pay, the cost of health insurance, employer contributions to retirement accounts, and reimbursements for business expenses. No overtime is due on these amounts.

The Part 778 regulations provide additional guidance on the types of compensation included and excluded from the regular rate and overtime calculation. The regulations have seen only minor updates since 1950, although much has changed in employee compensation over the last 60 years. The law is often unclear regarding whether employers must pay overtime on perks popular in today’s workplace.

The Department’s final rule updates its interpretations, often providing helpful examples, to clarify what types of compensation employers must and need not include in the regular rate for overtime pay purposes.

Discretionary Bonuses

Under the FLSA, employers must pay overtime on non-discretionary bonus, but not on discretionary bonuses. The definition of “discretionary” in the FLSA, however, is different from that used in common vernacular. To be discretionary, the bonus cannot be announced to the employee in advance and the amount of the payment must not be determined under any formula based on standard metrics (e.g., hours worked, performance, revenue, profit). Stating in a bonus plan that it is discretionary does not make it so. Employers often struggle in determining whether a bonus is discretionary or non-discretionary. The final rule includes new examples of discretionary bonuses that employers need not include in the overtime calculation:

Reimbursement for Expenses

Reimbursement of business expenses is excludable from the regular rate if the amount of the reimbursement is “reasonably approximate” to actual expenses incurred. If the reimbursement is too low, a minimum wage violation can result. If the reimbursement is too high, the excess amount is included in the regular rate and overtime is due. Employers have long struggled with finding that middle sweet spot that will not result in FLSA liability.

In the final rule, the Department first clarified that reimbursement of the actual cost of cell phones, organizational membership dues, and credentialing exam fees need not be included in the regular rate. More importantly, the Department provided a presumption of FLSA compliance if an employer reimburses travel expenses at the Federal Travel Regulation (FTR) or IRS rates. A new section provides that the presumption does not create an inference that reimbursements exceeding the FTR or IRS rates must be included in the regular rate. The Department left unanswered the important question of whether reimbursements at less than the FTR or IRS rates, without more, can establish a minimum wage violation.

Pay for Time not Worked

In the final rule, the Department also added new examples of paid leave and time off that need not be included in the overtime calculation:

Wellness Programs

As wellness programs are a more recent development, the prior regulations had not addressed wellness benefits at all. The Department has corrected that omission by providing that the cost of most wellness benefits are not includable in the overtime calculation, including:

Tuition Programs

Increasingly common is the popular perk of assisting employees with educational expenses. Unfortunately, in the “no good deed goes unpunished” category, some employers have been sued for failing to pay overtime on the value of such programs. The Department has provided a definitive answer to this issue to the benefit of employer and employee alike. The final rule excludes from the regular rate the following amounts, whether paid directly to the employee, education provider, or through a third-party provider:

Other Exclusions from the Regular Rate

The final rule has another common theme: Payments that do not depend on hours worked, services rendered, job performance, or other criteria that depend on the quality or quantity of the employee’s work do not need to be included in the regular rate. Some examples from the final rule include:

The new rule is effective January 15, 2020.

Employer Action

Finally, with no risk of overtime liability, employers can now consider providing some of these perks to their employees.

Joe Boone, MBA, SPHR, SHRM-SCP, CPC is the CEO and Chief Ethics and Compliance Officer of Strategic HR Solutions, LLC.

A contributing expert to numerous LinkedIn training events, he has authored over 350 articles on LinkedIn and has been a featured speaker at numerous SHRM events nationwide.

He is a 20 year Marine Corps officer, retiring at the rank of Lieutenant Colonel in 1995, and has worked in human resources, in various areas of management since then.

Strategic HR Solutions, LLC is a human resources consulting firm, that provides small businesses with a wide range of virtual and onsite HR solutions to meet their immediate and long-term needs.

Their team of talented professionals are considered to be subject matter experts in the areas of employee relations, performance management, leadership, compensation and benefits, diversity, and investigations.

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