DOL Issues Rule Updating Guidance on Permissible Exclusions from Regular Rate of Pay
Knowledge

DOL Issues Rule Updating Guidance on Permissible Exclusions from Regular Rate of Pay

Key Takeaways:

  • For the first time in 60 years, the U.S. Department of Labor (DOL) is issuing a rule that updates its guidance in connection with permissible exclusions from the regular rate of pay

  • Majority of the changes in the final rule are solely interpretative, but they provide much needed clarity for employers

  • This gives businesses the opportunity to reduce contentious wage and hour litigation over what compensation is included in the regular rate

  • Final rule published on December 16, 2019, and is effective January 15, 2020

Brief Background

Under the Fair Labor Standards Act (FLSA), non-exempt employees must be paid “at a rate of not less than one and one-half times the regular rate of which he is employed” for any hours the employee works in excess of 40 hours within a workweek. The regular rate is defined as “all remuneration for employment paid to, or on behalf of, the employee,” with the exception of eight categories. For years, these “categories of exclusion” have been litigated, causing massive expense and a considerable headache for employers nationally.

Guidance

Below is a brief summary of some of the more significant changes listed within the final rule:

  • Meal Breaks: The final rule provides that pay received for a meal break period does not convert to hours worked, absent an agreement or past practice of doing so.
  • Pay for Foregoing Holidays or Leave: The prior regulation referenced holiday and vacation time only. Now, the final rule clarifies that all forms of unused leave will be treated the same for determining whether the sums paid are excluded from the regular rate. Accordingly, the department will treat all such time the same with respect to whether it should be included in the regular rate.
  • Reimbursable Expenses: The department has notably removed the word solely from this regulation, providing now that expenses are reimbursable in all cases “where an employee incurs expenses on his employer’s behalf or where he is required to expend sums by reason of action taken for the convenience of his employer.” Accordingly, the expenses need not only benefit the employer.
  • Call-Back Pay: Call-back pay is when an employee completes their shift and is then called back to work. Under some state and/or local laws, an employer is required to provide additional compensation to the employee for being called back in, such as a requirement to pay a minimum of four hours, regardless of how long the employee actually performs work. Under prior regulations, the call-back payment is excluded only if infrequent or sporadic. The DOL’s guidance broadens the exclusion, so long as the call-back payments are not “so regular that they are essentially prearranged.” Of course, any hours actually worked would not be excluded here.
  • “Clopening” Pay: Clopening pay means pay for employees who are required to work until closing on a late shift and then work an opening shift early the next morning. Some jurisdictions require this sort of pay when there is not a minimum number of hours between the end of one shift and the start of another. The final rule permits exclusion of these payments as long as they are not too frequent, i.e., prearranged.
  • Reporting Time Pay: Some state and local laws require employers to compensate an employee who reports to work and is sent home due to a lack of work. These payments are excluded from the regular rate. The final rule clarifies that any new state and/or local laws that require this reporting pay will be treated the same under existing regulations.
  • Schedule Change Premiums: As a new trend, many localities, including New York City, now require additional payment when an employer changes an employee’s schedule without proper notice. The final rule provides that these are excludable as long as they are not essentially prearranged.
  • Bonuses: The DOL cautioned that, as has always been, bonuses that merely identify the payment as discretionary are insufficient to guarantee that the bonus is truly optional. The DOL further provided examples of excludable discretionary bonuses: bonuses to employees who made unique or extraordinary efforts; severance bonuses; employee-of-the-month bonuses; and bonuses for overcoming challenging or stressful contributions.

Next steps

While this final rule is interpretative and non-binding, employers should review these changes carefully to determine applicability to their workforce.

The final rule further serves as a reminder to employers to conduct a pay audit as a best practice, especially as we await the impending white-collar regulations, as well as any changes that may be applicable in your state or local laws—which could very well be different than the interpretations discussed in the federal final rule.

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