On March 28, 2019 (for the first time in 50 years) the Department of Labor (DOL) announced a proposed rule to amend 29 CFR part 778 to clarify and update regular rate requirements under section 7(e) of the Fair Labor Standards Act (FLSA) changing the definition of the "regular rate" of pay—the building block for calculating overtime. The FLSA generally requires overtime pay of at least one and one-half times the regular rate of pay for hours worked in excess of 40 hours per workweek. The regular rate therefore determines how much nonexempt employees covered by the FLSA receive in overtime pay. (The regular rate includes hourly wages or salary, most bonuses, shift differentials, on-call pay and commissions. It excludes benefits, paid leave, Christmas bonuses, other gifts and discretionary bonuses. The regular rate is derived by adding up all non-overtime payments made to an employee in a week and dividing it up by the number of hours actually worked in the week.)
In 2018, the DOL’s Wage and Hour Division (WHD) held listening sessions for members of the public interested in changes to the regulation known as the “Overtime Rule”, which focused on revising the salary thresholds for the executive, administrative, and professional (white collar) exemptions from the FLSA minimum wage and overtime requirements. The proposal would increase the standard salary level to $679 per week (equivalent to $35,308 per year) from the current $455/week ($23,660 annually) originally set in 2004. Above this salary level, eligibility for overtime varies are based on job duties. An increase in salary thresholds under the overtime regulations may mean certain employers will need to assess their internal employee classifications and may find they need to either transition some of their exempt employees to non-exempt status or alternatively increase salaries. Keep in mind that transitioning employees from exempt to non-exempt status will likely increase overtime expenses, affect employee morale and/or turnover if such changes are perceived as demotions, change benefits, and require more time for recordkeeping. And there is a risk that employers could face litigation if employees whose classification changed feel they should have been non-exempt the entire time and are now due back-pay for overtime decide to file a claim. Another option for employers is to increase the salaries of impacted employees. However, with salaries going up there is a possibility that budgetary constraints may force the employer to downsize. Wage compression could result, where employees who did not get a raise while others did find their salaries too close to those who work for them, creating dissatisfaction and potential morale issues.
The Department proposes clarifications to the regulations to confirm that employers may exclude the following from an employee’s regular rate of pay:
· 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; and
· Tuition programs, such as reimbursement programs or repayment of educational debt.
The proposed rule also includes additional clarification about other forms of compensation, including payment for meal periods, “call back” pay, and others.
The DOL estimates that 1 million workers may be affected by the proposal as compared to the estimated 4.2 million that would have been newly eligible for overtime pay under the Final Overtime Rule released in 2016 under the Obama Administration that remains enjoined in the courts.
The Notice of Proposed Rulemaking (NPRM) published on March 29, 2019 in the Federal Register, interested parties may submit comments on the proposal at www.regulations.gov in the rulemaking docket RIN 1235-AA24 by May 28, 2019.
HR should start evaluating its current compensation and benefit offerings to determine whether there may be opportunities to modify or expand those offerings in the next cycle, should the proposed rule go into effect. Until a decision is made, employers should continue to comply with existing federal overtime regulations, as well as applicable state requirements.