This Special Bulletin was authored by Lisa S. Charbonneau

On March 29, 2019, the Department of Labor (DOL) published proposed new rules on the Regular Rate requirements (i.e., the rate at which overtime must be paid) under the Fair Labor Standards Act (FLSA).  The proposed rules may be found here.  The comment period for the proposed rules closes on May 28, 2019.

The most significant part of the proposed new rules is an update to Part 778 of the Code of Federal Regulations (CFR), which governs Overtime Compensation under the FLSA.  In particular, the bulk of the proposed rules update a subpart titled “Payments that May be Excluded from the ‘Regular Rate,’” which provides guidance on various types of compensation excluded from the regular rate.  Relevant here, the subpart addresses the following payments in some detail: Extra Compensation for Overtime (see 29 CFR sections 778.201-207), Bonuses (see 29 CFR sections 778.208-215), and Payments Not for Hours Worked (see 29 CFR sections 778.216-224).  This bulletin will focus on the changes proposed to the subsection entitled “Payments Not for Hours Worked,” which provides guidance on items of compensation excluded from the regular rate under 29 USC 207(e)(2).

The proposed changes are not final.  By seeking comments on their proposed regulatory changes, the DOL is seeking public input into what it has proposed.  If final rules are issued (which is likely) they may be the same, similar or completely different from the proposed rules.  As such, employers should not change current pay practices to align with the proposed rules.  Rather, before modifying how you calculate overtime, you should wait to see what is included in the final rules, if, and when, they are issued. 

Background on the Regular Rate

Under the FLSA, an employee is entitled to time and one-half his or her “regular rate” for all hours worked in excess of the applicable FLSA overtime threshold, which is generally forty hours in a seven-day workweek.  The Act defines the regular rate as including “all remuneration for employment” except compensation specifically excluded under one of eight exclusions set forth in the Act at 29 USC 207(e).

One such exclusion is a significant focus of the proposed new rules: 29 USC 207(e)(2), which excludes the following from the regular rate:

  • “payments made for occasional periods when no work is performed due to vacation, holiday, illness, failure of the employer to provide sufficient work, or other similar cause;”
  • “reasonable payments for traveling expenses, or other expenses, incurred by an employee in the furtherance of his employer’s interests and properly reimbursable by the employer; and”
  • “other similar payments to an employee which are not made as compensation for his hours of employment.”

Much of the DOL’s proposed rules apply this provision to the 21st-century workplace.   Indeed, most of Part 778 of the regulations was issued in 1950 and the most recent substantive update to the Part was in 1968.  Due to the significant changes in the workplace and employee compensation since that time, the proposed rules are a helpful guide for applying the FLSA to the 21st-century workplace.

Specific Guidance from the Proposed New Rules on Payments Not for Hours Worked that are Excludable from the Regular Rate

Instead of providing a comprehensive summary of the entirety of the DOL’s proposed changes to Part 778, we have identified certain proposed updates that are particularly relevant to employers.

Holiday, Vacation & Sick Leave Cash Outs

Many employers provide various forms of paid leave that may be used or if unused, converted into cash payments paid directly to employees.  Under the proposed new rules, the DOL would consider cash-outs of accumulated vacation, holiday, and/or sick leave (also referred to as leave sell-backs or buybacks) excludable from the regular rate – regardless of whether the leave is used contemporaneously or cashed-out in a lump sum at a later date.  However, the proposed rules make a distinction between sick leave cash outs not tied to the use of sick leave, which the DOL would consider excludable from the regular rate, and payment of an attendance bonus for nonuse of sick leave, which the DOL would consider included in the regular rate.  As the final rules are issued, we will monitor carefully this distinction drawn by the DOL.  Depending on how this issue is resolved in the final rules, employers may need to closely examine how they characterize their employees’ right to cash out sick leave. Per the proposed rules, the characterization (is it based on sick leave usage or not?) could make the difference between whether the cash out may or may not be excluded from the regular rate.

Wellness Programs, Gym Memberships, On-Site Treatment by Medical Specialists, and Similar Payments

Employers are increasingly providing significant “wellness” benefits to employees.  Such benefits take many unique forms.  Pursuant to the proposed new rules, the employer cost of furnishing any of the following may be excluded from the regular rate: treatment provided on-site from specialists such as chiropractors, massage therapists, physical therapists, personal trainers, counselors, or Employee Assistance Programs; gym access, gym memberships, fitness classes and recreational facilities; wellness programs, such as health risk assessments, biometric screenings, vaccination clinics, nutrition classes, weight loss programs, smoking cessation programs, stress reduction programs, exercise programs, and coaching to help employees meet health coals; and discounts on employer-provided retail goods and tuition benefits not tied to quantity or quality of work performed.  While this proposed new rule does not necessarily announce new law, if it becomes part of the final rules it would be a welcome clarification that employers may offer these sought-after benefits without concerns for their regular rate impacts.

Employer Contributions to Accident, Unemployment, or Legal Services Benefits Plans

Although not pertaining to the exclusion found at 29 USC 207(e)(2), the proposed new rules also clarify that employer contributions to accident, unemployment, or legal services benefit plans are excludable from the regular rate.  If this proposed new rule becomes part of the final rules, employers will have more freedom to provide such benefits to their employees without fear that such contributions must be included in the regular rate.

Per Diems

Per diems are allowances for lodging, meals and incidental expenses provided to employees traveling on employer business.  Pursuant to the proposed new rules, per diems may be excluded from the regular rate when they are less than or equal to the per diems permitted under the Federal Travel Regulation System, 41 CFR Subtitle F.  Current federal per diem rates for various California localities may be found here.  Note that higher per diems may also be excludable from the regular rate if they are reasonable, but under the proposed rules, following the federal rates will best ensure the per diem amounts are excludable from the regular rate.  If this proposed change becomes part of the final rules, employers will no longer have to guess what is “reasonable” for purposes of excluding a per diem payment from the regular rate.

Call Back, Call Out Pay and Similar Extra Payments

Many employers provide minimum call back or call out pay for employees required to return to work due to an emergency or other unforeseen circumstance.  Under the proposed new rules, when callbacks or call outs are “so regular that they are essentially prearranged,” the entire minimum payment for callbacks or call-outs must be included in the regular rate – even if actual hours worked are less than the minimum callback or call-out amounts.  The example of a regular, essentially prearranged call back provided by the proposed new rules is an employee called back during the busiest part of the day for six weeks out of two months in a row.  The practical effect of this proposed guidance requires evaluation on a case-by-case basis depending on an employer’s specific callback / call out policies and practices.  Most employers (and their payroll systems) do not require employees to record actual hours worked when they are called back and receive minimum callback pay.  Rather, they record all hours as hours worked.  Existing law provides that minimum call back payments (e.g., an employee is paid a minimum of four hours for being called back even though the employee may only be called back for two hours) are excludable from the regular rate.  If the proposed change becomes part of the final rules, employers may wish to consider ensuring that their payroll systems distinguish between actual hours worked and the minimum payments made for callbacks and only include minimum callback payments in the regular rate if they meet the proposed test of being “so regular that they are essentially prearranged.”

Paid Meal Breaks

Although not required under the FLSA, some employers provide paid meal breaks to their employees.  The proposed new rules clarify that payments for bona fide meal periods (where no work is performed) may be excluded from the regular rate.  This clarification was designed to reflect existing law, including a 2004 Ninth Circuit case, Ballaris v. Wacker Siltronic Corp., which held that payments for lunch periods are excluded from the regular rate.

What Is Next?

Until May 28, 2019, members of the public are invited to comment on the DOL’s proposed rules prior to their adoption into what will be the final rules.  Comments must be written and submitted on or before May 28, 2019.  Electronic comments may be submitted here.  After the comment period closes, the DOL will review the comments along with the published proposed rules, and at some point in the future, will likely issue the rules in final form.  At that time, the new rules will become the official guidance of the DOL.  Liebert Cassidy Whitmore is following this matter and will provide updates as needed.

If you have questions about the applicability of these proposed rules, please consult with wage and hour counsel for answers.  But note, until the rules are in final form, they have no legal effect and are only indicative of the intent of the DOL.