What is the “regular rate of pay” for a nonexempt employee? The answer is needed when calculating hourly overtime wages, which must exceed base wages by 50%. New regulations from the U.S. Department of Labor (DOL) that take effect January 15 update the definition of “regular rate of pay” to guide your overtime pay calculations.
To Include or Exclude?
These days, employees enjoy many “perks,” such as wellness programs, holiday bonuses, parking passes, free meals and tuition payment plans. That’s great news for workers. But employers may be uncertain which of these benefits should be added to basic wages to calculate overtime pay.
It’s been more than 50 years since the DOL regulations defining an exempt employee’s “regular rate of pay” have been overhauled. The updated rules are intended to “better reflect the 21st Century workplace,” according to the DOL.
Under Section 7 of the Fair Labor Standards Act (FLSA), for overtime calculation purposes, employee pay includes “all remuneration from employment” unless it’s explicitly excluded under the law. In addition to nonexempt employees’ wages and salaries, remuneration categories subject to overtime pay calculations include:
- Incentive pay, and
- Nondiscretionary bonuses that are linked to preset formulas including those based on productivity.
Large employee benefit-oriented remuneration excludable from overtime pay calculation include employer contributions to retirement plans and health benefits. Excludable discretionary bonuses include holiday bonuses and others classified as “in the nature of a gift.”
Adaptable Rules for an Evolving Workplace
Technically, the new rules under Part 778 of CFR (Code of Federal Regulations) Title 29 offer only “guidance” for employers. The DOL “intends the interpretations to be used by employers, employees and courts to understand employers’ obligations and employees’ rights under the [FLSA],” the regulations state.
That’s because some new categories of compensation might come along not specifically addressed in the new rules. However, the principles they reveal should give you a good idea of what you need to do. One goal of the new rules, according to the DOL, is to “encourage employers to provide additional and innovative benefits to workers without fear of costly litigation.”
Examples of new employee benefits that have proliferated since the original rules were promulgated include programs promoting wellness, smoking cessation, fitness, nutrition, weight loss, health risk assessments, vaccination clinics and various other forms of training to help employees meet their health goals.
Even more basic benefits like paid vacation and sick leave, while covered under the original rules (and excludable from overtime pay calculations), have evolved. For example, the combining of paid sick and vacation days into paid time off (PTO) wasn’t a common practice until after the prior round of regulations was issued. Under the new regs, the combining of those two paid leave categories doesn’t change their excludable status.
Other changes in employee benefit and compensation practices necessitating updated regs have been propelled by new local laws. Examples include extra pay to employees whose shifts have been rescheduled with limited notice.
Primary Pay Categories
The new rules were issued in proposed form in March 2019. The final rules have only a few technical tweaks. Under the basic rules, there are three categories of compensation that can be excluded from the definition of regular rate of pay:
- 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.
- Other similar payments to an employee that aren’t made as compensation for his or her hours of employment.
The hundreds of pages of new regulations explain how the DOL arrived at its opinions. The regulations feature many examples and illustrations.
Clarifications under the new regulations include the status of the following excludable employee perks:
- Employer reimbursements for business expenses, such as travel expenses, association membership dues and cell phones for business use,
- Employer payment for certain categories of hazard insurance policies, such as those covering unemployment, legal expenses and accidents,
- Payments employers must make to offset their violation of local laws requiring extra employee compensation for abrupt shift changes,
- The value of free snacks and coffee provided to employees, and
- 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.
Another major topic covered in the new regs is excludable vs. nonexcludable bonuses. The updated rules clarify that the following types of bonuses are includable as pay subject to overtime:
- Most attendance bonuses,
- Individual or group production bonuses,
- Bonuses for quality and accuracy of work, and
- Bonuses contingent upon the employee’s continuing employment until the time of payment is to be made.
A bonus, to be excludable, “must not be paid pursuant to any prior contract, agreement or promise.” In contrast, bonuses that are “announced to employees to induce them to work more steadily or rapidly or more efficiently or to remain with the firm” are regarded as part of the regular rate of pay — that is, they’re not excludable.
For More Information
Given the scope and level of detail of the new rate of pay regs, now is a good time to review your current method of determining overtime pay. Contact your tax and payroll professional for more information on the new rules and assistance on implementing the changes.