Department of Labor Finalizes Rule Addressing Benefits and Payments Excludable from Overtime Calculations

Key Points:

• The United States Department of Labor has issued a Final Rule modifying a number of regulations addressing exclusions from the “regular rate” used to calculate an employee’s overtime compensation under the Fair Labor Standards Act. The revised regulations take effect on January 15, 2020.
• The revised regulations confirm that employers may exclude unused paid leave, pay required by state and local law, employee benefits and perks, and benefit-plan contributions from the regular rate calculation.
• The revised regulations also provide additional guidance regarding when and whether premium pay, discretionary bonuses, gifts, and expense reimbursements may be excluded from the regular rate.

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On December 16, 2019, the Department of Labor (DOL) published a Final Rule that modifies a number of regulations to provide additional examples of benefits, perks, and pay that fit within the Fair Labor Standards Act’s (FLSA) exclusions from the regular rate. The Final Rule’s preamble and the revised regulations clarify that certain payments and benefits offered to employees may be excluded from the regular rate.

• Bonuses to employees who made unique or extraordinary efforts that are not awarded according to pre-established criteria, discretionary severance bonuses, referral bonuses for employees not primarily engaged in recruiting activities, bonuses for overcoming challenging or stressful situations, employee-of-the-month bonuses and similar discretionary bonuses. However, nondiscretionary bonuses must still be included in regular rate calculations.
• Gifts provided to employees throughout the year, such as coffee or snacks.
• Sign-on bonuses with or without clawback provisions, so long as any clawback provisions are not pursuant to a collective bargaining agreement, city ordinance or policy, or other similar document.
• Contributions to benefit plans whose primary purpose is to provide systematically for the payment of benefits to employees on account of accident, unemployment, legal services or other events that could cause significant future hardship or expense.
• Reimbursements for work-related employee cell phone plans, organization membership dues, or credentialing exam fees.
• Reimbursement amounts for employee travel expenses equal to, or less than, the maximums permitted by Internal Revenue Service guidance issued under 26 C.F.R. 1.274–5(g) or (j). Reimbursement for travel expenses in excess of these amounts may also be excludable in appropriate circumstances.
• Paid leave for attending a funeral, adoption or child custody hearings or school activities; donating organs or blood; voting; or volunteering as a first responder.
• Paid sick, military or family medical leave; any nonroutine paid leave required by state or local law; and general paid time off (PTO).
• Pay outs for unused PTO, holidays or sick leave.
• Payments or penalties mandated by state or local law for show-up or reporting pay, so long as such payments or penalties are made on an infrequent or sporadic basis.
• All call-back or call-out pay and other similar payments that occur without prearrangement (including payments required by state or local law for failure to provide required rest between shifts or required notice of a schedule change), regardless of their frequency.
• Parking benefits; on-site treatment from specialists such as chiropractors, massage therapists, physical therapists, personal trainers, counselors or Employee Assistance Programs; gym access or memberships; fitness classes; recreational facilities; wellness programs (such as health risk assessments; biometric screenings; vaccinations; nutrition classes; or weight loss, smoking cessation, stress reduction, exercise, financial wellness or mental health programs), including the cost of coaching and counseling; discounts on employer-provided retail goods and services; tuition benefits; adoption assistance; and emergency childcare.

Additionally, the DOL has increased the amount of additional payments that can be excluded from a basic rate as “trivial.” Under the revised regulations, additional payments that do not increase the employee’s total overtime compensation by more than forty percent of the highest applicable minimum wage when apportioned among the overtime workweeks in the period in which such additional payments are made now qualify for exclusion.

The above changes provide confirmation or clarity regarding numerous types of compensation and benefits that have grown in popularity over the past several years, and will enable employers to invest in their nonexempt employees with increased confidence that the investments will not increase overtime costs.