March 28, 2019

Employers wouldn't have to factor in bonuses or the value of wellness programs, paid leave cashouts, expense reimbursements and other nonwage job perks when calculating workers' overtime pay under a new rule the U.S. Department of Labor proposed Thursday.

The Fair Labor Standards Act generally makes employers pay overtime-eligible workers at one-and-one-half times their "regular rate" for each hour worked over 40. The DOL's Thursday Notice of Proposed Rulemaking on the Regular Rate under the Fair Labor Standards Act excludes from the calculus several nonwage payments and perks that would otherwise boost workers' overtime rate.

Under the new rule, if a worker earns $15 per hour and gets a gym membership worth $50 per month or elects to be paid out eight hours of vacation time rather than take a day off, his or her overtime wage would still be $22.50.

The DOL's announcement frames the regulation as an update to current rules that it says discourage employers "from offering more perks to their employees as it may be unclear whether those perks must be included in the calculation of an employees' regular rate of pay."

"The proposed rule focuses primarily on clarifying whether certain kinds of perks, benefits, or other miscellaneous items must be included in the regular rate," the agency said. "Because these regulations have not been updated in decades, the proposal would better define the regular rate for today's workplace practices."

A notice of proposed rulemaking is the first step in the regulatory process. The notice invites public input on the plan, which the DOL must consider before issuing a final rule at a later date. The comment period will open when the rule publishes Friday and close May 28.

The FLSA requires employers to pay overtime based on workers' regular rates, which it defines as "all remuneration for employment paid to, or on behalf of, the employee," minus eight types of nonwage compensation laid out in FLSA Section 7(e). Thursday's rule reinterprets these exceptions.

The rule adds to an exception for vacation, holiday or sick pay any cashouts of unused time. Currently, this exception excludes from the regular rate calculation any such time workers use. Under the new rule, employers that let workers opt for cash in lieu of time off would not factor those payments into the regular rate for a given period. This applies to vacation, holiday or sick time payouts and the "paid time off" employers are increasingly offering in lieu of separate leave types, the DOL said.

The rule also updates an exception for "other similar payments ... not made as compensation" to include the cash value of perks such as onsite health treatment by chiropractors and massage therapists, employer-provided gym memberships, employee discounts on company merchandise and tuition reimbursement.

And it tweaks an exception for certain "sums paid in recognition of services performed," or discretionary bonuses. The new rule says a few bonus types generally included in the overtime calculation may actually be excluded in certain cases. It also lists a handful of example discretionary bonuses, such as payouts for winning employee of the month honors or rewards for "unique or extraordinary efforts."

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But it may not be a good thing if the regulation leads more employers to offer more perks, said Cohen Milstein Sellers & Toll PLLC attorney D. Michael Hancock, a former WHD assistant administrator who represents workers in wage suits.

Hancock worries that the rule would let "employers move compensation from wages into these benefits" to reduce their overtime liabilities. Although it is unlikely employers will slash workers. wages and start offering gym memberships, they may implement new benefits in lieu of future raises, he said.

"My only concern, frankly, is that we will see a net decrease over time in what would otherwise be cash wages, as more compensation is moved into these benefit categories," Hancock said.

The regular rate proposal comes a few weeks after the DOL unveiled its long-awaited update to the white collar overtime rule, which workers' advocates attacked as a shell of the Obama administration's nixed plan to extend overtime protections to millions more workers.

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