What Perks Must Employers Include in Overtime Pay Calculations?

For the first time in 50 years, the U.S. Department of Labor (DOL) has proposed an update to the Fair Labor Standards Act's (FLSA's) definition of the "regular rate" of pay, which is used to calculate overtime premiums for nonexempt employees.

The Society for Human Resource Management (SHRM) supports the proposed revisions. "Changes to the regular rate regulations affect the workplaces of nearly every SHRM member and the employees they serve," according to a letter SHRM submitted to the DOL. SHRM believes that "employees and employers are best served with a system that promotes maximum flexibility in structuring employee pay and benefits and clarity for employers when preparing total compensation packages."

[SHRM members-only toolkit: Complying with U.S. Wage and Hour Laws and Wage Payment Laws]

Many employers aren't sure if certain perks must be included in the regular rate of pay. So instead of risking a lawsuit, according to SHRM, some employers are choosing not to offer competitive benefits such as:

• Anniversary bonuses.
• Public transportation subsidies.
• Discounts on gift cards.
• Discounts with vendor partners.
• Tuition reimbursement.
  
• Employer-provided or discounted meals.
• Noncash awards (such as coffee cups and T-shirts).
• Raffles.

The DOL's proposal should reduce the risk of "no good deed goes unpunished" lawsuits against employers who choose to offer certain benefits, noted Tammy McCutchen, an attorney with Littler in Washington, D.C.

Calculating the Regular Rate

Under the FLSA, nonexempt employees must be paid at least 1 1/2 times their regular rate of pay for hours worked beyond 40 in a workweek. 

But the overtime rate isn't based only on the employee's hourly wage, McCutchen explained. It includes all remuneration for employment unless the compensation falls within one of eight statutory exclusions. The regular rate includes hourly wages and salaries for nonexempt workers, most bonuses, shift differentials, on-call pay and commissions. However, it excludes health insurance, paid leave, holiday and other discretionary bonuses, and certain gifts.

Unless an exception applies, "regular rate" means everything of value, McCutchen said.

An employer can't simply choose its own regular rate. Rather, "it is an 'actual fact' based on mathematical computation," the DOL stated in a 2018 opinion letter.

The department's proposed rule would clarify that the following perks are excluded from the definition of regular rate:

• Tuition reimbursement benefits.
• The value of an employee discount.
• The cost of an employer-provided gym.
• The cost of providing wellness programs and onsite specialist treatment.
• Reimbursed expenses, including travel expenses that do not exceed the maximum travel reimbursement under the Federal Travel Regulation system.
• Accident, unemployment and legal services, which the DOL considers to be benefits plans.

Employer Support

Employers and other interested parties had until June 12 to submit comments on the proposal, but the government received only about 80 comments. It received nearly 200,000 for the proposed federal overtime rule.  

This is a technical issue, and many people may not understand the law, McCutchen said, noting that she is happy that the DOL took on this issue.

Liz Washko, an attorney with Ogletree Deakins in Nashville, Tenn., observed that employer groups have focused on the following factors in support of the proposed rule:

• The DOL's regular rate clarifications encourage innovative benefits and perks, and small businesses in particular will benefit from being able to provide these without increasing labor costs through additional overtime liability.
• Employers are burdened by making complicated calculations for benefits that vary in value, frequency and usage.
• Tying overtime premiums to certain perks would lead to inflated overtime for some employers but not others.  

Few employee-advocate groups submitted comments opposing the proposed changes. "I don't think it's that controversial to say, 'Let's clear the road so employers can provide these perks without fear of being sued,' " McCutchen noted.

Washko observed that comments appearing to oppose the clarifications said:

• The proposed rules would reduce employee compensation.
• The proposal might adversely affect low-wage earners because employers may decide to limit overtime liability by increasing benefits but not wages.

Further Clarification Requested

SHRM noted that providing clarification on the types of bonus payments that can be included as discretionary will likely increase these types of payouts to employees. SHRM "appreciates the department's efforts to clarify these provisions, but requests that it go still further in clarifying discretionary bonus payments," according to the letter.

For example, sign-on bonuses may be considered discretionary, and including a provision that requires an employee to remain employed for a specified period of time or repay the sign-on bonus should not alter the analysis, SHRM said.

SHRM also asked the DOL to harmonize the overtime and regular rate of pay regulations in a comment submitted on the proposed federal overtime rule.

Tips for Employers

Employers should consider evaluating their current compensation, incentives and benefits to confirm that they are correctly characterizing each element as something to be included in or excluded from the regular rate, Washko said. They should also note any state wage and hour laws that differ from federal rules and ensure they are complying with all applicable standards.

Employers may also want to determine what additional benefits and perks they may be able to provide to enhance recruiting and retention efforts—without incurring additional overtime liability—under the proposed federal clarifications and applicable state laws, she said.

When will the DOL issue a final rule? It's hard to say. In addition to the changes to the regular rate, the DOL has proposed changes to the FLSA's exempt salary threshold and the definition of joint employer.  

"With three active proposals, there's a lot of work to do," McCutchen said. She thinks the DOL will try to have all three rules finalized this year—or possibly by early next year—as 2020 is a presidential election year. "You can never assume the president will win a second term," she said.