Calculation of “regular rate” of pay is something which has long given employers fits, and the US Department of Labor (“DOL”) has taken a step which it hopes will clarify the definition, something which hasn’t been done in 50 years. On December 12, 2019 the Final Rule interpreting “regular rate” was announced.
Under the Fair Labor Standards Act (“FLSA”) employers are required to pay non-exempt workers time and one half the “regular rate” for every hour worked over 40. According to the regulations, the “regular rate” includes all remuneration paid to the employee except for certain payments specifically excluded under the FLSA. This would include wages paid by the hour, by salary, or by piecework and most bonuses, commissions, incentive pay, shift differentials, and on-call pay. Excluded payments, by definition, are premium payments for certain work (e.g. Sunday premium pay), discretionary bonuses, holiday gifts, and vacation pay.
Employers often expressed confusion about which financial benefits needed to be included. The new rule, which goes into effect on January 15, 2020 provides some additional guidance which does not materially change the rules but does list many benefits which are not to be included:
- Parking benefits, wellness programs, onsite specialist treatments, gym access and fitness classes, employee discounts on retail goods and services, certain tuition benefits, and adoption assistance.
- Payment for unused paid leave.
- Penalties employers must pay under state and local scheduling laws.
- Business expense reimbursement for items such as cellphone plans, credentialing exam fees, organization membership dues, and travel expenses that do not exceed the maximum travel reimbursement under the Federal Travel Regulation system or the optional IRS substantiation amounts for certain travel expenses.
- Certain sign-on and longevity bonuses.
- The cost of complimentary office coffee and snacks.
- Discretionary bonuses.
- Contributions to benefit plans for accidents, unemployment, legal services and other events that could cause future financial hardship or expense to the employee.
The reality is that compensation to employees, especially compensation tied to doing work (shift differential) or quantitative or qualitative performance (commissions, incentive pay based on meeting company or individual goals) is part of the regular rate while discretionary pay (holiday bonuses, anniversary gifts) or non-cash perks (breakfast muffins, an on-site gym) are not. Employers should review their payroll and compensation plans to make certain that they are treating all forms of remuneration consistent with the new DOL rule.
 Note that simply calling a bonus discretionary does not make it so. A fact-based analysis is required.