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The New FLSA “Regular Rate” Clarifications: Part 1

The Department of Labor (DOL) has been busy lately, and not just by increasing the threshold for salaried, exempt employees under the Fair Labor Standards Act (FLSA). That threshold increased on January 1, 2020 for the first time since the Bush Administration from $455 per week to $684 per week. However, this past last week, some more consequential regulations took effect. On January 15, the DOL’s new regulations affecting the calculation of the “regular rate” of pay took effect, in an attempt to “provide clarity and to better reflect the 21st-century workplace.” This is a 3 part series. You can also read Part 2, Part 3, or our TL;DR summary.

We have discussed how to calculate the regular rate before in other contexts, such as with employees who earn commissions or have reimbursable expenses. As you know, the FLSA requires that employers pay overtime at one and one-half times an employee’s “regular rate” of pay for hours in excess of 40 per week for jobs that are not exempt from overtime. The new regulations affect only non-exempt, overtime-eligible jobs.

The phrase “regular rate” is a term of art, and can be the source of significant confusion. The regular rate does not include only the employee’s hourly wages (or salary, if the employee is a salaried, non-exempt employee).  The FLSA defines the “regular rate” more broadly to include “all remuneration for employment paid to, or on behalf of, the employee,” except for certain enumerated types of payments. Under the FLSA, remuneration that employers must add to the regular rate includes not only commissions but also non-discretionary bonuses, shift differentials, hazard premiums and other incentive payments based on hours worked, production, or efficiency.

The FLSA (but maybe not applicable state law) specifically excludes, among other things, paid leave (vacation, PTO, sick leave, etc.); expenses incurred on an employer’s behalf; overtime premiums; Saturday/Sunday/holiday premiums; discretionary bonuses; and, more rarely, some gifts and payments on special occasions. Many of these categories have their own nuances, such as “discretionary” vs. “non-discretionary” bonuses or fringe benefits, too.

In part 1 of this series, we’ll look at how the DOL clarified certain events that relate to employees’ work schedules.

Clarification #1: “bona fide” meal periods

The Final Rule clarifies that payment for bona fide meal periods are excluded from the regular rate. We have looked at this issue in the past, but to recap, under the FLSA employers do not have to pay employees for “bona fide meal periods,” because the regulations do not consider them to be work time. For a break to qualify as a bona fide meal period, “[t]he employee must be completely relieved from duty for purposes of eating regular meals,” and the break must generally be at least 30 minutes or longer. The rules even allow periods shorter than 30 minutes to qualify as unpaid “under special circumstances.” For example, in a 2004 opinion letter, the Department of Labor found that an employer could permissibly reduce its 30-minute unpaid lunch break to 20 minutes and provide an extra 10 to 15-minute paid break, given that the arrangement was the product of collective bargaining between the employer and a union.

In promulgating this new rule, the DOL noted an apparent contradiction between sections 778.218(b) and 778.320 of the FLSA regulations on whether employers could exclude bona fide meal periods from the regular rate. Section 778.320(b) follows the rule we have discussed before: payments for “time spent in eating meals between working hours” may be excluded even when such time is compensated. Section 778.218, however, previously seemed to contradict this. The first part of the regulation included similar language to excluding payments made for periods when work was not performed, but subsection b of the former regulation also stated that this clause “deals with the type of absences which are infrequent or sporadic or unpredictable,” not with regularly scheduled lunch periods or rest days. The new regulations eliminates this potential incompatibility and confirms that employers would only need to include payments for bona fide meal breaks when the parties (directly, or via a collective bargaining agreement) have both paid for a meal period and elected to treat it as hours worked. (The latter condition is pretty uncommon.)

Clarification #2: Pay for showing up or coming back

“Show-Up” Pay

Prior DOL regulations provided that employers who provided “show-up” pay (minimum payments for reporting to work, made regardless of whether the employee works the entire period or completes available work and is sent home before the period ends) could exclude that pay from the regular rate calculation. Show up pay is a regular feature in many CBAs covering trades, and has been an increasing focus of state and local governments (along with predictable scheduling laws, which we cover below). If you aren’t familiar with the concept, show-up pay is pretty simple. An employer with a 4-hour show-up pay policy would pay an employee for a minimum of 4 hours anytime an employee reports for work, even if the employee is sent home after 2 hours. Some newer state laws require show-up pay.

A recent trend in state and local laws protecting employees has been to award minimum pay to employees who cannot work scheduled hours because their employer reduced or changed the regularly scheduled shift hours without a defined notice period. Section 778.200(c) of the new regulations clarifies that this kind of “show-up” or “reporting” pay mandated by law is still “show-up” pay for FLSA purposes. As such, an employer can exclude it from the regular rate of pay, provided that such payments are made on an infrequent and sporadic basis.

“Call-Back” Pay

The new regulations also clarify a related type of “special” pay, “call-back” pay. Under Section 778.221 of the prior FLSA regulations, the regular rate includes any pay an employee receives for hours worked after being called back after the end of a normal shift. This concept is similar to show-up pay. Instead of having a shift shortened, the employee works more, such as having to return for an emergency, and gets paid a minimum amount regardless of the actual hours worked. The additional amount that the employer pays the employee simply for being called back to work (beyond amounts for hours actually worked) is excluded from the regular rate calculation.

The prior rule limited the exclusion to call-back payments that happened on an “infrequent” or “sporadic” basis. The new regulations broaden the exclusion further by eliminating those references to the frequency of call-backs. However, employers who are regularly scheduling or “prearranging” call-back shifts still must include those payments in the calculation of the regular rate, and the new regulations insert some uncertainty here. “The key inquiry for determining prearrangement is whether the extra work was anticipated and therefore reasonably could have been scheduled,” the Final Rule explains. Under the new regulations, just because an employee was called back regularly does not necessarily mean that their call-back periods were prearranged. However, the reverse is now true as well: an employer that calls back an employee just once could still be found liable for an FLSA violation if the call-back “reasonably could have been scheduled.” We’ll have to see if this is an area that wage and hour plaintiff’s attorneys will explore in the months and years ahead.

Other Similar Payments: Predictability Pay or Schedule Change Premiums

The regulations also address “extra payments which are similar to call-back pay,” including “predictability pay” and state or local law-mandated payments for lack of rest between shifts. Some cities, such as Seattle and New York City, now require employers to pay schedule change premiums or penalties if they fail to provide sufficient notice to an employee of a change or cancellation of a shift. Others require premium payments when employees do not get a specified rest period between shifts, often referred by the portmanteau “clopening.” Clopening describes when an employee works until closing and then returns to work the opening shift the next day. As with call-back pay, the Final Rule provides that these extra payments may be excluded from the regular rate of pay under Section 207(e)(2) of the FLSA. Again, this exclusion only applies if the payments are not “prearranged.”

Employer Takeaways

The clarifications by the DOL are useful in helping to make the regular rate calculation easier for employers facing a patchwork of state and local laws, CBAs, and policies. However, given the emphasis on “prearranged” payments, employers can expect that some of the prior litigation over whether payments were “infrequent” or “sporadic” will simply shift to whether payments were “prearranged.”

In the next installment in this series, we will take a look at how the new FLSA regulations clarify certain employee benefit plans, from PTO to premium pay to bonuses.

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