On December 12, 2019, the Department of Labor (DOL) announced a Final Rule that clarifies and amends federal regulations concerning the regular rate of pay under the federal Fair Labor Standards Act (FLSA).  Many of the affected regulations date back more than 60 years, long before the FLSA was made applicable to the public sector.   The effective date of the modified regulations is January 15, 2020.   They were published in the Federal Register today, December 16, 2019.

All public agencies should evaluate how they pay overtime and develop a strategy to not only ensure compliance with the new regulations, but also how best to take advantage of the regulations to save on overtime costs.  This can, and likely will, include meeting and conferring with employee associations and labor unions whose employees will be impacted by changes in the calculation of overtime. 

The Final Rule specifically addresses whether certain employee perks and benefits must be included in the FLSA regular rate of pay for overtime.  Among the most relevant items for public agencies are the DOL’s clarifications that holiday-in-lieu pay and sick leave buy backs may be excluded from the regular rate.

Holiday in lieu pay is common in the public sector for public safety employees who are scheduled to work without regard to holidays because the service is provided 24 hours a day, seven days a week.  Employees receive pay for holidays in lieu of taking the holidays off as their shift may or may not fall on one of the holidays provided by the agency.  Prior to the issuance of the Final Rule, case law and other DOL interpretations of whether this pay must be included in employees’ regular rate of pay were mixed and thus, the issue has not been settled.  The new regulations clarify that when an employee works instead of taking a holiday off, and receives holiday pay in addition to normal pay for the work performed, the additional holiday pay may be excluded from the regular rate.  This is the case whether the payment is issued immediately or at some later time (e.g., upon cashing out accrued holiday hours), as well as if employees are paid a flat percentage each pay period as pay in lieu of holiday pay.

Sick leave buy backs are also common in the public sector for all employees, not just for public safety employees.  Employees may be given the opportunity to cash out a certain amount of sick leave per year that may or may not be tied to sick leave usage.  The Final Rule provides that sick leave buy backs are treated the same as vacation buy backs and other occasional payments for unused leave.  Specifically, the Final Rule excludes the payments for sick leave buy backs from the regular rate of pay.  Two federal Circuit Courts of Appeals have held that sick leave buy backs must be included in the regular rate.    The rationale of those decisions was that allowing employees to cash out sick leave was akin to an attendance bonus, i.e., an incentive not to use sick leave. The Final Rule tracks Balestrieri v. Menlo Park Fire Protection District (a 2015 Ninth Circuit Court of Appeals decision won by Liebert Cassidy Whitmore), which held that buy back payments for annual leave (a combination of sick leave and vacation) were excludable from the regular rate.

The Final Rule makes an important distinction between sick leave buy backs and attendance bonuses, which involve an employee receiving an incentive payment that does not affect his or her leave balance or is tied to factors unrelated to the illness period, such as a perfect attendance record.  Per the Final Rule, non-discretionary attendance bonuses are still included in the regular rate of pay.  However, it is now clear that if, due to sick leave usage or for any other reason, an employer allows an employee to cash out sick leave, the payment for the cash out may be excluded from the regular rate of pay.

The Final Rule further clarifies that the following items are among those that may be excluded from the regular rate of pay (subject to certain conditions):

  • The cost of off-site parking, wellness programs, onsite specialist treatment, gym access and fitness classes, employee discounts on retail goods and services, tuition programs, and adoption assistance;
  • Employer contributions to Health Savings Accounts;
  • State or locally mandated payments or penalties (such as call-back pay, show-up pay, and similar payments) that attach when, before or after reporting to work as scheduled, the employee is not provided with the expected amount of work (provided that such payments or penalties are infrequent or sporadic);
  • Reimbursement for business-related expenses including a cell phone plan, organization membership dues, credentialing exam fees, and travel, even if not incurred “solely” for the employer’s benefit;
  • Sign-on bonuses (unless subject to a claw-back provision (i.e., a provision allowing the bonus to be taken back by the employer if certain conditions occur) under a collective bargaining agreement, or city ordinance or policy);
  • Office coffee or snacks provided to employees as gifts; and
  • Employer contributions to benefit plans for accident, unemployment, legal services, or other events that could cause future financial hardship or expense.

The Final Rule addresses two issues related to cafeteria plans.  First, the Final Rule follows the Ninth Circuit’s ruling in Flores v. City of San Gabriel that cash payments in lieu of health benefits must be included in the regular rate of pay.  Additionally, the Final Rule includes discussion of the standard that employer contributions for premiums and other benefits under a cafeteria plan are excludable from the regular rate as long as cash payments to employees in lieu of benefits are “incidental.”  The DOL’s comments to the Final Rule expressly reference twenty percent (20%) as the threshold for when the amount of cash paid in lieu of benefits is incidental.

While the Final Rule may prompt employers to make adjustments to their regular rate calculations, we recommend first consulting with trusted legal counsel to assess FLSA compliance.  The Final Rule, like the FLSA in general, presents various complexities that must be navigated carefully, such as attaching conditions to various exclusions from the regular rate.  Employers should also consider their meet and confer obligations in advance of implementing any changes to overtime compensation.

Liebert Cassidy Whitmore can provide your agency with legal counsel to help ensure compliance with the Final Rule and modified regulations.  This can include working with your Finance staff on payroll issues, Human Resources staff on meet and confer obligations or on other strategies that may be implicated at your agency by these changes.  We will be conducting trainings throughout the state in early 2020 that will go into detail about the Final Rule and new regulations.  Look for upcoming announcements about the training, and register early because you won’t want to miss this critical information.