Overtime Pay Calculations under Review: DOL Issues Proposed Update to Regular Rate of Pay Regulations

For the first time in over 50 years, the U.S. Department of Labor (DOL) has proposed updates to the Fair Labor Standards Act’s (FLSA) “regular rate of pay” regulations. Specifically, the DOL published a proposed rule that clarifies the types of pay and benefits employers must include when determining a nonexempt employee’s overtime pay rate. While this proposed rule has not become final or effective as of yet, if implemented, the update could provide employers with significant relief from inadvertent overtime miscalculations. 

The FLSA requires employers to pay nonexempt employees one and one-half times their regular rate of pay for all hours worked in excess of 40 hours in a workweek. This requirement can be deceptive because an employee’s regular rate of pay is not always the same as his or her hourly rate. Instead, an employee’s regular rate of pay is calculated by dividing the total compensation for the workweek by the total number of hours worked. In other words, an employee’s regular rate of pay includes, without limitation, the employee’s hourly rate plus any commissions, non-discretionary bonuses, piece-rate pay, shift premiums, and other forms of similar compensation. As a consequence, an employee’s regular rate of pay may be higher than his or her hourly rate, which results in higher overtime compensation. 

The DOL’s proposed rule will update the applicable regulations to clarify whether certain pay and benefits can be excluded from such “regular rate of pay” calculations. Specifically, the proposed rule will permit employers to exclude the following from their overtime calculations:

• The cost of providing wellness programs, onsite specialist treatment, gym access, fitness classes, and employee discounts on retail goods and services;
• Payments for unused paid leave, including paid sick leave;
• Reimbursed expenses, even if not incurred “solely” for the employer’s benefit;
• Certain reimbursed travel expenses;
• Discretionary bonuses;
• Benefit plans, including accident insurance, unemployment compensation, and legal services; and
• Tuition programs, such as reimbursement programs or repayment of educational debt.

Additionally, the proposed rule includes clarification about other forms of compensation, including payment for meal periods and “call back” pay.

Perhaps of most significance, the DOL has proposed examples of discretionary bonuses that may be excludable from overtime pay calculations.  The examples include employee-of-the-month bonuses, bonuses to employees who made unique or extraordinary efforts that are not awarded according to pre-established criteria, severance bonuses, bonuses for overcoming stressful or difficult challenges, and other bonuses for which payment is in the sole discretion of the employer.

The DOL is accepting comments about the proposed rule until May 28, 2019.  After this comment period, the DOL will publish the final rule, which may incorporate edits from the comment period. Honigman’s Labor and Employment attorneys will continue to monitor the proposed rule and will provide further updates in the future.