Can Wellness Perks Be Excluded from Employees’ Regular Rate of Pay?

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Can Wellness Perks Be Excluded from Employees’ Regular Rate of Pay?

Employers might want to offer more wellness perks now that the federal government has modernized the definition of "regular rate" of pay—which is used to calculate overtime premiums.

The rule makes clear that the cost of providing wellness programs—including perks awarded as part of these programs—falls within the class of benefits now excluded from the regular-rate calculation, explained Alejandro Leiva, an attorney with Greenspoon Marder in Boca Raton, Fla. 

The U.S. Department of Labor (DOL) said the new rule, which takes effect Jan. 15, should give employers more flexibility.

As with any program, employers should clearly communicate with employees about what benefits are offered and who is eligible and document whether any costs will be excluded from the regular rate in reliance on the final rule, noted Joshua Nadreau, an attorney with Fisher Phillips in Boston.

About the New Rule

Under the Fair Labor Standards Act (FLSA), nonexempt employees generally must be paid 1.5 times their regular rate of pay for all hours worked beyond 40 in a week. But the regular rate includes more than just an employee's base hourly wage. Employers must consider "all remuneration for employment paid to, or on behalf of, the employee," except for specific categories that are excluded from the calculation, such as:

  • Discretionary bonuses.
  • Payments made when no work is performed, such as vacation or holiday pay.
  • Gifts.
  • Irrevocable benefits payments.
  • Payments for traveling expenses.
  • Premium payments for work performed outside an employee's regular work hours.
  • Extra compensation paid according to a private agreement or collective bargaining.
  • Income derived from grants or options.

Essentially, the FLSA excludes a variety of benefits that are not given as compensation for the employee's hours of work. The final rule updated and modernized the items that can be excluded from the calculation, said Kathleen Caminiti, an attorney with Fisher Phillips in Murray Hill, N.J., and New York City.

The DOL clarified that employers may exclude a number of perks from the regular-rate calculation, including wellness programs, onsite specialist treatments, and gym access and fitness classes. Workplace wellness programs are similar to on-the-job medical care and recreational facilities, the department said, "conveniences that the regulations already specify are excludable from an employee's regular rate."

An employer can rely on DOL regulations as a defense to claims brought under the FLSA, noted Walter Stella, an attorney with Cozen O'Connor in San Francisco. So the new DOL rule creates a helpful "safe harbor" for employers to exclude wellness programs when calculating an employee's regular rate of pay, he said.

Wellness Program Compliance

An employer wellness program is intended to improve and promote health and fitness by offering employees premium discounts, cash rewards, gym memberships, and other incentives to participate, according to HealthCare.gov. Examples of such plans include smoking-cessation, diabetes-management and weight-loss programs, as well as financial-planning services and preventative health screenings.

Wellness programs can be provided to employees as preventive measures to help avoid illness while improving and maintaining the general health of the employees.

"If employers know they can offer wellness programs without the threat of potentially protracted class or collective action litigation and without potentially having to track employee participation in these activities for purposes of calculating the regular rate," the DOL said, "employers might feel more encouraged to offer such programs."

Whether or to what extent a particular perk can be excluded depends less on the label, even incentives or discounts, and more on eligibility terms and, conceivably, the employer's role in offering the perk, Nadreau said. For example, a gym-employer offering a discount on gym membership could call for a somewhat different analysis than a banking entity offering it.

[SHRM members-only toolkit: Designing and Managing Wellness Programs]

Two of the most common types of wellness benefits—incentives and discounts—are not specifically addressed in the final rule, but employers are likely allowed to exclude them from the regular rate.

While the DOL has endeavored to provide many examples, its list is illustrative only, Nadreau noted.

According to the DOL, "The benefit must be conditioned only on being an employee, although conditions unconnected to the quality or quantity of work, such as a reasonable waiting period for eligibility, are permissible." The department warned, however, that the benefit can't be "wages in another guise."

Common incentives awarded to employees as part of wellness programs, such as prepaid gift cards, should now fall within the definition of excludable payments, Leiva said, so long as these rewards are not contingent upon "hours worked, services rendered, job performance, or other criteria that depend on the quality or quantity of the employee's work."

Tips for Employers

Ensuring a wellness program is legally compliant in the first place can sometimes be tricky due to the various laws that come into play, Leiva said. In addition to the FLSA, employers have to be sure their programs follow the Americans with Disabilities Act (ADA), the Genetic Information Nondiscrimination Act (GINA), the Health Insurance Portability and Accountability Act, and the Affordable Care Act.

For instance, the ADA and GINA generally prohibit employers from collecting employee health and genetic information. But both laws have an exception that permits the collection of such information as part of employer wellness plans, as long as an employee provides such information voluntarily.

With regard to wage and hour compliance, Leiva said, all employers should prepare clear guidelines about how eligible employees will qualify for certain wellness program incentives. He recommended assigning a designated HR representative to monitor the wellness program for consistency with the internal guidelines.

"With the assistance of a qualified labor and employment attorney familiar with the legal do's and don'ts of wellness programs," he noted, "these guidelines would make clear that any incentives awarded as part of such programs are in no way, shape or form tied to job performance." 

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