May 02, 2019

Proposed rule clarifies and updates regular rate of pay used in overtime calculations

On March 28, 2019, the United States Department of Labor (DOL) proposed a rule to clarify and update requirements under the Fair Labor Standards Act (FLSA), which define the regular rate of pay. These requirements have not been updated for more than 50 years and currently do not fully reflect contemporary workplace practices. The DOL issued a fact sheet on its proposed rule. This proposed rule follows an earlier proposed rule for increasing the salary thresholds of white collar overtime pay exemptions which is discussed in a recent client alert.

Understanding the regular rate of pay is key for all employers because overtime calculations multiply the regular rate of pay by 1.5 to determine overtime pay rate for all nonexempt employees working in excess of 40 hours in a workweek. The regular rate of pay is not just an employee’s regular rate of pay; it also includes “all remunerations for employment” unless excluded by Section 7(e) of the FLSA. For instance, the regular rate of pay includes nondiscretionary bonuses, commissions and shift differentials. It excludes holiday bonuses, vacation pay (because it is not pay for hours worked), the cost of health insurance, the employer’s contribution to retirement plans and reimbursement for business expenses.

The DOL’s proposed rule identifies more payments that would be excluded from the regular rate calculations. The DOL expressly indicates that it is proposing this update and clarification to encourage employers to offer these benefits to their employees without fear of costly overtime pay wage and hour litigation. It hopes that this rule will improve workplace morale, employee compensation and employee retention.

The DOL proposes that the following payments not be included as an employee’s regular rate of pay for purposes of calculating overtime pay:

  • Payments for unused paid leave, including paid sick leave;
  • Payments for reimbursed business expenses, including those not “solely” incurred for the employer’s benefit;
  • Payments reflecting the cost of providing wellness programs, onsite specialist treatment, gym access and fitness classes;
  • Payments for reimbursed travel expenses;
  • Discretionary bonuses;
  • Payments for benefit plans, including accident, unemployment and legal services;
  • Employee discounts on retail goods and services; and
  • Payments reimbursing student loans and other tuition programs.

Public comments on the proposed rule are encouraged but must be received no later than May 28, 2019. To send a public comment, click here  

In addition to proposing that these modern benefits be excluded from the regular rate of pay, the DOL also proposes clarifying that employers do not need a prior formal contract or agreement with employees to exclude certain overtime premiums described in Sections 7(e)(5) and (6) of the FLSA. The DOL also proposes clarifying that time that would not otherwise qualify as “hours worked,” which can include meal periods, can be excluded from the regular rate unless there is an agreement or established employment practice that treats the time as hours worked.

For more information regarding this proposed rule, contact a Chuhak & Tecson Employment law attorney.

This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.

Client alert authored by: Jeralyn H. Baran, Principal