GENERAL

 

What is the subject of this Final Rule?

In this Final Rule, the Department clarifies and updates a number of the regulations interpreting the regular rate requirements under the Fair Labor Standards Act (FLSA). These regulations are in 29 CFR Part 778. The regular rate determines how much nonexempt employees covered by the FLSA receive in overtime pay, as the Act generally requires overtime pay of at least one and one-half times the regular rate for time worked in excess of 40 hours per workweek. Regular rate requirements define what forms of payment employers include and exclude in the “time and one-half” calculation when determining workers’ overtime rates.

The Final Rule focuses primarily on clarifying whether certain kinds of benefits or “perks,” and other miscellaneous items must be included in the regular rate. Because these regulations have not been updated in decades, the Final Rule will better define the regular rate for today’s workplace practices and will allow employers to more easily offer perks and benefits to their employees.

Where can I review the comments received on the Department’s Notice of Proposed Rulemaking (NPRM) for this Final Rule?

The Department received approximately 80 comments from the regulated community. The comments, along with the Department’s Notice of Proposed Rulemaking (“NPRM”) are available at www.regulations.gov under Rule Identification Number (RIN) 1235-AA24.

What is the “regular rate”?

The FLSA generally requires that covered, nonexempt employees receive overtime pay of at least one and one-half times their regular rate of pay for any hours worked in excess of 40 hours per workweek. An employee’s regular rate includes all remuneration for employment, subject to eight exclusions outlined in section 7(e) of the FLSA.

Regular rate requirements define what forms of payment employers include and exclude in the “time and one-half” calculation when determining workers’ overtime rates. 

Who is entitled to the minimum wage and overtime pay under the FLSA?

Most employees covered by the FLSA must be paid at least the federal minimum wage (currently $7.25 per hour) and overtime pay at least one and-one-half times their regular rate of pay for any hours they work beyond 40 in a workweek. However, the FLSA exempts certain employees from the minimum wage and/or overtime pay requirements.

Why is the Department revising these regulations now?

The Department’s regular rate regulations have not been significantly revised in over 50 years. At that time, typical compensation consisted predominantly of traditional wages, paid time off for holidays and vacations, and contributions to basic medical, life insurance, and disability benefits plans. Since then, the workplace and the law have changed.

First, employee compensation packages, including employer-provided benefits or “perks,” have evolved significantly. Many employers, for example, now offer various wellness benefits, such as fitness classes, nutrition classes, weight loss programs, smoking cessation programs, health risk assessments, vaccination clinics, stress reduction programs, and training or coaching to help employees meet their health goals.

Similarly, both law and practice concerning more traditional benefits, such as sick leave, have evolved in the decades since the Department first promulgated the regulations in part 778. For example, instead of providing separate paid time off for illness and vacation, many employers now combine these and other types of leave into paid time-off plans. Moreover, in recent years, a number of state and local governments have passed laws requiring employers to provide paid sick leave.1 

Recently, several states and cities have also begun considering and implementing scheduling laws, which require penalty payments to employees when employers utilize certain scheduling practices.2 Some of these laws expressly exclude the penalty payments from the regular rate under state law, and employers may be confused as they try to determine how these and other penalty payments may affect regular rate calculations under federal law.

In this Final Rule, the Department is updating the regulations to reflect these and other such developments in the 21st-century workplace.

What are the final changes to the regulations?

The Final Rule focuses primarily on clarifying whether certain kinds of benefits or perks and other miscellaneous payments must be included in the regular rate. In relevant part, the Department revises the current regulations to confirm the following:

  • 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. 

Finally, the Department makes two substantive changes to the existing regulations. First, the Department eliminates the restriction in §§ 778.221 and 778.222 that “call-back” pay and other payments similar to call-back pay must be “infrequent and sporadic” to be excludable from an employee’s regular rate, while maintaining that such payments must not be prearranged. Second, the Department updates its regulations on “basic rate”, which is authorized under section 7(g)(3) of the FLSA as an alternative to the regular rate under specific circumstances. Under the current regulations, employers using an authorized basic rate may exclude from the overtime computation any additional payment that would not increase total overtime compensation by more than $0.50 a week on average for overtime workweeks in the period for which the employer makes the payment. The Final Rule updates this regulation to change the $0.50 limit to 40 percent of the higher of the applicable local, state, or federal minimum wage.

What is the estimated economic impact of the Final Rule?

The Department estimates that the Final Rule would result in one-time regulatory familiarization costs of $30.5 million. However, the Final Rule would not impose any new requirements on employers or require any affirmative measures for regulated entities to come into compliance. Therefore, there are no other costs attributable to this deregulatory Final Rule.

The Department expects that the Final Rule will encourage some employers to start providing certain benefits that they may presently refrain from providing due to apprehension about potential overtime consequences, which in turn might have a positive impact on workplace morale, employee compensation, and employee retention. 

When is the Final Rule Effective?

The Final Rule is effective January 15, 2020. For more information visit www.dol.gov/agencies/whd/overtime/2019-regular-rate. 

 

Footnotes

1 In 2011, for example, Connecticut became the first state to require private-sector employers to provide paid sick leave to their employees. Today, several states, the District of Columbia, and various cities and counties require paid sick leave, and many other states are considering similar requirements.

2 In the last 5 years, for example, New York, San Francisco, Seattle, and other cities have enacted laws imposing penalties on employers that change employees’ schedules without the requisite notice, and various state governments are considering and beginning to pass similar scheduling legislation.