On the heels of issuing its sweeping proposal to overhaul federal overtime regulations, the Department of Labor (DOL) has proposed another rule that will have major impact on employers and how they assess overtime pay.
This proposed rule deals with how employers go about figuring an employee’s regular rate of pay (RROP), which is used to help calculate whether an employee is exempt from overtime regulations. Robert A. Boonin, an attorney with the law firm of Dykema Gossett, termed it “a development that may be even bigger news, or at least more significant for employers” than the overtime changes themselves.
Under the current rules, RROP is not limited to the employee’s base rate of pay but also must include non-discretionary production bonuses, longevity bonuses, commissions, lead premiums and shift premiums. These amounts increase the RROP and as a result increase the amount of overtime compensation an employee must be paid.
“The regulations requiring these amounts to be rolled-into a non-exempt employee’s pay have been in place and unchanged for more than 50 years,” notes Boonin. Although compensation systems have evolved since then, DOL, the courts and employers have struggled with the question about whether these new types of payments must also be rolled-into employees’ RROP.
“Specifically, the confusion regarding what amounts should be included in the calculation of the regular rate of pay has generated a great deal of litigation and often conflicting judicial decisions,” Boonin explains.
According to DOL, the current rules discourage employers from offering more perks to employees because it may be unclear to them whether those perks must be included in the calculation of RROP, observes Anne G. Bibeau, an attorney with the law firm of Vandeventer Black. The proposed rule seeks to clarify which kinds of perks, benefits or other miscellaneous items must be included in the RROP.
Under the proposal employers will be allowed to exclude from their RROP calculations:
● The cost of providing wellness programs, onsite specialist treatment, gym access, and fitness classes, and employee discounts on retail goods and services.
● Payments for unused paid leave, including paid sick leave.
● Reimbursed expenses, even if not incurred “solely” for the employer’s benefit.
● Reimbursed travel expenses that do not exceed the maximum travel reimbursement permitted under the Federal Travel Regulation System regulations and that satisfy other regulatory requirements.
● Discretionary bonuses.
● Benefit plans, including accident, unemployment and legal services.
● Tuition programs, such as reimbursement programs or repayment of educational debt.
The proposed rule clarifies the fact that employers do not need a prior formal contract or agreement with employees to exclude certain overtime premiums provided for working more than eight hours in a day, holidays, weekends and the like, Boonin adds. It also makes clear that time paid which otherwise would not be regarded as “hours worked” (such as bona fide meal periods) also may be excluded from an employee’s regular rate unless an agreement or established practice indicates that these have been treated all along as hours worked.
In addition, the proposal supplies further examples of types of benefit plans—such as accident, unemployment and legal services—that may be excluded from an employee’s regular rate of pay. All of these items have been excludable from the RROP all along, but the proposed rule makes that fact clearer, according to Bibeau.
The proposed rule also provides additional clarification about other forms of compensation, including payment for meal periods, “call back” pay and others. For example, the new rule would eliminate the current restriction excluding “call-back” pay and other payments similar to call-back pay from RROP only to instances that are “infrequent and sporadic,” but still states that if such payments are so regular, they are essentially prearranged and are to be included in the RROP, Boonin says.
“Although the proposed rule is not a material change from the current rule, it serves as an occasion for employers to revisit how they are calculating the RROP, and thus overtime pay, to ensure that they are doing it correctly,” Bibeau points out. “Improper calculation of the RROP that causes an underpayment in overtime pay can lead to significant liability.”
Boonin offers one additional warning: Employers need to keep in mind that while many states are likely to adopt the federal standards for calculating RROP, some may not. If DOL’s proposed rule eventually goes into effect as currently written, employers would still need to determine if they satisfy state rules.
