Under the Fair Labor Standards Act, non-exempt employees must receive one and one half times their regular rate of pay for all hours worked over forty in a work week.  The “regular rate” is generally calculated by dividing the employee’s compensation by the number of hours worked.  The regulations, however, do not address how certain forms of compensation might affect the regular rate calculation.  On December 16, 2019, the United States Department of Labor (“DOL”) released the final rule updating the regulations that govern how the regular rate is calculated.  The new rule is intended to provide additional guidance and address certain types of compensation that have become more common since the regulations were initially implemented.  The new rule takes effect January 15, 2020.

Payments that can be Excluded from Regular Rate

The new rule states that the following types of compensation may be excluded from the regular rate:

  • 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; and
  • call-back pay and other similar payments, regardless of whether the payments are infrequent and sporadic.

Additional Guidance Regarding Discretionary Bonuses

The new rule also includes additional guidance regarding when a bonus is deemed discretionary. The FLSA generally excludes discretionary bonuses from the regular rate.  Determining whether a bonus is discretionary or non-discretionary, however, requires an analysis of the specific facts.

The current rule includes examples of non-discretionary bonuses, but does not provide examples of discretionary bonuses.  The new rule now includes a paragraph which states that discretionary bonuses may include “bonuses to employees who made unique or extraordinary efforts which are not awarded according to pre-established criteria, 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 other similar compensation.”

The new rule cautions that the list of examples is non-exhaustive, and the labeling of a bonus is not determinative.  Ultimately, determining whether a bonus is discretionary or non-discretionary will still require a fact specific analysis, but the new rule will make it easier for employers to decide when to exclude bonuses from the regular rate calculation.

Next Steps for Employers

Employers should review their payroll practices to ensure that they are properly calculating the regular rate for non-exempt employees, especially if the employer is paying any of the types of compensation listed in the new rule.  In addition, the new rule provides an opportunity for employers to offer new forms of compensation that they may have forgone in the past because they were not sure how it would affect the regular rate.

This alert does not purport to be a substitute for advice of counsel on specific matters.

Harris Beach has offices throughout New York State, including Albany, Buffalo, Ithaca, Melville, New York City, Rochester, Saratoga Springs, Syracuse, Uniondale and White Plains, as well as New Haven, Connecticut and Newark, New Jersey.