Under the federal Fair Labor Standards Act, employers are required to pay overtime to non-exempt employees at one-and-one-half times the employee’s “regular rate of pay” for all time worked in excess of 40 hours in a workweek. The regular rate is not necessarily the same as the employee’s normal hourly rate. Rather, it is calculated as an hourly equivalent of the total amount paid to employees for their work.
Not all compensation and benefits are included in the regular rate. The FLSA contains several provisions excluding particular types of compensation from the calculation, such as vacation and holiday pay. According to the Labor Department, its recent revisions to the FLSA regulations, which took effect Jan. 15, 2020, are meant to reflect some of the developments in the workplace and changes to typical compensation and benefits packages that have evolved over time.
Employers may be tempted to make adjustments to their “regular rate” calculations after the revisions. But like the FLSA in general, the revised guidance is complex, with several conditions and prerequisites that employers need to navigate. There is also a risk that courts may choose not to defer to the DOL’s guidance, because courts have historically treated the DOL’s regular rate regulations as interpretive guidance rather than binding rules with the force of law. Finally, employers should be mindful of potential obligations to meet and confer with labor organizations.
For those reasons, employers should consult with trusted wage and hour attorneys to ensure compliance with the FLSA before making changes to employees’ overtime compensation.
One of the more interesting issues addressed by the revised guidance relates to sick leave buy backs—where a policy allows employees to cash out a certain amount of unused sick leave each year.
Previously, the DOL regulations addressed cash-out of vacation leave but did not mention sick leave buy backs. Accordingly, two federal appellate court decisions held that sick leave buy backs must be included in the regular rate, reasoning that allowing employees to cash out sick leave was essentially an attendance bonus.
Under the amended regulations, sick leave buy backs are treated the same as vacation buy backs. The final rule distinguishes sick leave buy backs from attendance bonuses (which are still included in the regular rate of pay) because a buy back exchanges unused leave for cash, while an attendance bonus does not affect the employee’s leave balances.
Another significant issue discussed in the guidance is health benefit “cafeteria plans.” The final rule affirms court decisions, including the 2016 Ninth Circuit ruling in Flores v. City of San Gabriel, stating that cash payments to employees who opt out of health benefits must be included in the regular rate.
The rule also confirms that if cash payments in lieu of benefits are more than “incidental,” all employer contributions to the plan must be included in the regular rate. The rule indicates that such payments are incidental where they amount to less than 20% of the employer’s total payments into the plan.
The Flores court did not identify any particular percentage of plan assets paid as cash that would make cash payments more than incidental.
The amended regulations also address several specific perks and benefits that may be excluded from the regular rate:
The final rule relaxes the requirements for when “call-back” pay (i.e. minimum compensation payable when an employee is called back to duty outside of a scheduled shift) can be excluded from the regular rate. Previous regulations required that call-back pay be “infrequent or sporadic.” The new regulations remove that language, but still require that call-back pay is not so frequent that it is essentially pre-arranged.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
This article was authored by Partner Peter Brown and Associate Lars Reed for Bloomberg Law on February 20, 2020. You can read the article on Bloomberg Law’s site here.