U.S. Department of Labor Issues New Rule Clarifying Exclusions from Overtime Calculation

By Joshua R. Woodard and Jennifer R. Yee

On December 12, 2019, the U.S. Department of Labor (“DOL”) finalized a new rule that lets employers leave several perks, including tuition benefits, paid leave cash-outs, and some bonuses, out of the formula used to calculate employees’ overtime pay. According to the DOL’s press release¹ , this new rule “marks the first significant update to the regulations governing regular rate requirements under the Fair Labor Standards Act (“FLSA”) in over 50 years.”

The DOL’s final rule on the regular rate under the FLSA modifies the requirements on how employers should calculate employees’ “regular rates” or the base wages to be multiplied by one-and-one-half when paying overtime. The new rule clarifies an uncertain set of earlier regulations so employers can “more easily offer perks and benefits to their employees,” the DOL said in its announcement.

The FLSA requires that non-exempt employees be paid overtime based on their regular rate, which it defines as “all remuneration for employment” divided by hours worked. The revised regulation reinterprets provisions of the FLSA excluding from the regular rate seven specific categories of compensation, including “gifts and payments on special occasions,” "vacation and sick pay in lieu of work," and “discretionary bonuses, payments to profit sharing or thrift or savings plans that meet certain requirements.”

The new rule classifies a host of modern perks as exceptions to the regular rate calculation, including payments for unused paid leave, cell phone and travel reimbursement, and the costs of parking benefits, wellness plans and gym access. The rule also excludes certain sign-on and longevity bonuses, as well as “discretionary bonuses,” which are those “determined at the sole discretion of the employer at or near the end of the period to which the bonus corresponds” and that are not “paid pursuant to any prior contract, agreement or promise causing the employee to expect such payments regularly.”

It is estimated that these changes will save workers and employers about $280 million in costs of litigating regular rate disputes, while employers would spend a fraction of that amount in one-time costs to familiarize themselves with the new rule.

Employers should be familiar with the DOL’s new regular rate rule, which takes effect on January 15, 2020, or 30 days after its publication in the Federal Register, which is set for Monday, December 16, 2019.