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.” In part one of our look at the changes, we looked at how the Department of Labor (DOL) clarified certain events that relate to employees’ work schedules. This is Part 2 in the series. You can also read Part 3 or our TL;DR summary.
To recap from part one, 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.
Today, we’ll tackle some special types of pay and benefits and how the new regulations impact what employers have traditionally done.
Clarification #3: Paid Time Off
We have discussed the labels applied to paid time off in past posts. Remember that the manner in which employees use typically matters more than the label employers apply to that leave, particular for state and local law purposes. At the federal level, Section 7(e)(2) of the FLSA allows employers to exclude from the regular rate any “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.” For example, if an employee works 38 hours over 4 days and then takes 8 hours of PTO, the 38 hours worked would be used to calculate the “regular rate,” not the total 46 hours paid for the week. Under the FLSA, paid leave does not count as hours worked nor does it factor into the regular rate.
The prior regulations only identified vacations and holidays, which obviously led to potential confusion. The Final Rule goes further, helpfully clarifying that employers can exclude from the regular rate payments for any form of paid time off, like unused vacation, holiday, or sick leave. The DOL’s Final Rule also acknowledges that employers increasingly provide a single, unified bank of leave regardless of reason, and confirms that employers may exclude payments pursuant to these unified leave banks from the regular rate. In adopting the Final Rule, the DOL expressly rejected the 10th Circuit appellate court’s decision in Chavez v. City of Albuquerque, 630 F.3d 1300 (10th Cir. 2011). The Chavez court had held that because the prior regulations only referred to vacation and not sick leave, payments for unused sick time would be included in the regular rate. The DOL instead agrees with the 9th Circuit’s decision in Balestrieri v. Menlo Park Fire Protection District, 800 F.3d 1094 (9th Cir. 2015), where the appellate court held that a buy-back program applying to both vacation and sick leave banks did not need to be included in the regular rate.
The Department’s lengthy summary of its changes in response to public comment also includes some helpful nuggets for employers on this point. In response to comments from the Wood Floor Covering Association, the DOL also included helpful language for employers. Many employees accrue leave based on hours worked, and not just based on the passage of time. The DOL explained that even if employers used this method to accrued paid leave, “the fact that paid leave may be accrued on an hourly basis would not disqualify pay for forgoing such leave from being excludable from the regular rate.”
Finally, the new Rule also adds a new, fourth example in Section 778.219(a) regarding holiday pay for emergency responders and others who both earn regular wages for working on a holiday and also receive holiday pay for that day.
Clarification #4: Reimbursement for Reasonable Expenses
Intuitively, when an employer pays an employee for expenses incurred by that employee for that employee’s own benefit (such as commuting expenses/car allowances, perks, meals, rent, etc.), employers must include those payments in the regular rate. Conversely, when an employer reimburses an employee for reasonable business expenses that the employee incurred for the employer, this is not remuneration. It is simply making the employee whole. In general, the former FLSA regulations tracked with your intuition, but not completely.
The former Section 778.217 stated that the exclusion of expenses incurred for the employer applied only if the employee incurred those expenses “solely” in the employer’s interest. Interestingly, the former regulations applied a narrower definition than the FLSA’s statutory language itself, which states that employers could exclude all expenses incurred “in the furtherance of [the] employer’s interests.” As the DOL explained in the Final Rule, both the agency and the courts have followed the statute, not the former regulations. Accordingly, the DOL removed the word “solely” from Section 778.217. A payment that benefits both an employer and employee, but that the employee nonetheless incurs “on the employer’s behalf or for [its] benefit or convenience” are now clearly excludable.
Clarification #5: Reasonableness of Expenses
This clarification is probably my favorite in the Final Rule. Trying to determine what is “reasonable” or “normal” is a challenge in many areas. We have discussed this in the context of employee travel time (“all in a day’s work”), employee commutes to different work locations (a “normal” commute), and how to determine a “normal” commute in the first place. In that series of posts, I referred you to the Office of Personnel Management’s (OPM) very detailed information about what the federal government considers a “normal commuting area” for federal employees in duty stations around the country.
Along these same lines, the DOL referred to the government’s regulations on “reasonable” expenses under the Federal Travel Regulation. Under Section 778.217(b), only reasonable expenses are excludable from the regular rate; payments beyond what is “reasonable” may be considered wages. The DOL’s Final Rule considers an expense to be per se reasonable if it is (1) “at or beneath the maximum amounts reimbursable or allowed for the same type of expenses under the Federal Travel Regulation,” or (2) within the reimbursement amounts set forth by the IRS in 26 C.F.R. § 1.274-5(g) and (j). Employers frequently use the IRS’s substantiation amounts in those regulations when calculating mileage and other reimbursements. In addition, the Final Rule expands the examples of reimbursable expenses in Section 778.217(b) to include reimbursement for “cell phone plans” and “organization memberships dues or credentialing exam fees where relevant to the employer’s business.” (The latter is good for lawyers and accountants, for sure).
Finally, the DOL clarified in the Final Rule that the Federal Travel Regulation or IRS amounts are not a bright line test. Reimbursements exceeding these amounts can still be reasonable, but must be evaluated on a case-by-case basis. Just as with a “normal commuting area” where employers can refer to OPM’s regulations, I would encourage employers to stick to the FTR or IRS limits whenever possible with reimbursements. Indeed, the DOL has provided a strong safe harbor against claims that you have miscalculated the regular rate because of unreasonably high reimbursements if you do so.
In part three of this series, we will examine the three remaining changes: (1) Premium payments for hours of work on special days or in excess or outside of specified daily or weekly standard work periods; (2) Discretionary Bonuses; (3) So-called “similar payments” under the FLSA, which are a catch-all for payments an employer makes to an employee for purposes other than as compensation for his or her hours of employment; and (4) certain benefit plan payments.