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Legal Alert

Labor Department Offers Employers Some FLSA Clarity Through New “Regular Rate” Interpretation

12.12.19

For the first time in over 60 years, the U.S. Department of Labor today issued a final rule updating its interpretative guidance with respect to permissible exclusions from the “regular rate.” According to the USDOL, the proposed rule is intended to better reflect the modern workplace and provide clarity to employers on what types of compensation, benefits, or perks may be excluded from the regular rate. While the majority of the changes in the final rule are “interpretative” – meaning they do not have the force of full-fledged regulations – they provide needed clarity to employers and should help reduce litigation over what is and what is not included in the “regular rate.” The Final Rule will be published on December 16, 2019, with an effective date of January 15, 2020.

Background

Under the Fair Labor Standards Act (FLSA), non-exempt employees must be paid “at a rate of not less than one and one-half times the regular rate of which he is employed” for any hours the employee works in excess of 40 hours in a workweek. The “regular rate” in turn, is defined as “all remuneration for employment paid to, or on behalf of, the employee,” subject to eight categories of exclusions.

It is these eight categories of exclusions that have provided ample ground for extensive and costly litigation, as the decision to exclude a certain sum may have considerable impact on an employee’s “regular rate.”

Modern Guidance

There is no dispute that the modes and methods of employee compensation have shifted significantly in the more than 60-year period since the USDOL last issued interpretative guidance on allowable exclusions. The changes discussed below are meant to harmonize the agency’s interpretations with the modern workforce.

Additional Interpretative Guidance

The final rule also addresses a variety of other miscellaneous issues. For example, it reiterates that bonuses that merely label the payment as “discretionary” are not sufficient to guarantee that the pay is truly optional in nature. It also provides additional examples of excludable discretionary bonuses: employee-of-the-month bonuses; bonuses to employees who made unique or extraordinary efforts; severance bonuses; and bonuses for overcoming challenging or stressful contributions. 

These changes may lead to employers issuing more discretionary bonuses without fear that they may need to be included in a regular rate calculation. The rule likewise clarifies that it is the USDOL’s position that contributions by an employer for “accident, unemployment, and legal services” are excludable under Section 7(e)(4)’s bona fide benefit plan contribution exception.

The final rule also eliminates reference to “employment agreements” and “contracts” with respect to voluntary premium payments for hours of work in excess of a daily work period, holidays, or Sundays. This change reflects the USDOL’s opinion that such a formal agreement is not necessary. According to the agency, this revision is consistent with its enforcement practices and court decisions.

What To Do Next?

Unlike the upcoming changes to the FLSA white-collar regulations, which will have the force of law, this final rule is predominately interpretative in nature. Nevertheless, you should review these changes carefully to determine whether any of the clarifications are applicable to your workforce.

If you have not recently audited your pay practices, both this final rule and the impending white-collar regulations provide a great opportunity to evaluate how you pay your workforce. You should approach your review with caution, however, as it also crucial to ensure you are complying with relevant state wage and hour law as well. While many states follow the FLSA and its interpretations, there are others who have their own interpretations which may be contrary to the USDOL’s.  

We will continue to monitor the legal and practical impact related to this new rule, so make sure you are subscribed to our alert system to gather the most up-to-date information. For help with compliance steps or to answer questions, please contact your Fisher Phillips attorney or any attorney in our Wage and Hour Practice Group.


This Legal Alert provides an overview of a specific federal development. It is not intended to be, and should not be construed as, legal advice for any particular fact situation.

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