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Wage and Hour Division (WHD)

Highlights of the Notice of Proposed Rulemaking (NPRM) on Regular Rate Under the Fair Labor Standards Act



General




Q. What is the subject of this proposed rule?

In this Notice of Proposed Rulemaking (NPRM), the Department proposes to clarify and update a number of the regulations interpreting the regular rate requirements under the Fair Labor Standards Act (FLSA). The regular rate determines how much nonexempt employees covered by the FLSA receive in overtime pay, as the Act generally requires overtime pay of at least one and one-half times the regular rate for time worked in excess of 40 hours per workweek. Regular rate requirements define what forms of payment employers include and exclude in the “time and one-half” calculation when determining workers’ overtime rates.

The proposed rule focuses primarily on clarifying whether certain kinds of perks, benefits, or other miscellaneous items must be included in the regular rate. Because these regulations have not been updated in decades, the proposal would better define the regular rate for today’s workplace practices.

Q. Where can I review, and how can I comment on, the Department’s Notice of Proposed Rulemaking (NPRM)?

The Department’s Notice of Proposed Rulemaking (“NPRM”) is available at www.regulations.gov under Rule Identification Number (RIN) 1235-AA24. The Department encourages all interested parties to participate in the rulemaking process by submitting written comments regarding the NPRM through the online portal provided at www.regulations.gov.

Q. What is the “regular rate”?

The FLSA generally requires that covered, nonexempt employees receive overtime pay of at least one and one-half times their regular rate of pay for any hours worked in excess of 40 hours per workweek. An employee’s regular rate includes all remuneration for employment, subject to eight exclusions outlined in section 7(e) of the FLSA.

Regular rate requirements define what forms of payment employers include and exclude in the “time and one-half” calculation when determining workers’ overtime rates.

Q. Who is entitled to the minimum wage and overtime pay under the FLSA?

Most employees covered by the FLSA must be paid at least the federal minimum wage (currently $7.25 per hour) and overtime pay at least one and-one-half times their regular rate of pay for any hours they work beyond 40 in a workweek. However, the FLSA includes exemptions to the minimum wage and/or overtime pay requirements for certain employees.

Q. Why is the Department revising these regulations now?

The Department’s regular rate regulations have not been significantly revised in over 50 years. At that time, typical compensation consisted predominantly of traditional wages; paid time off for holidays and vacations; and contributions to basic medical, life insurance, and disability benefits plans. Since then, the workplace and the law have changed.

First, employee compensation packages, including employer-provided benefits and “perks,” have evolved significantly. Many employers, for example, now offer various wellness benefits, such as fitness classes, nutrition classes, weight loss programs, smoking cessation programs, health risk assessments, vaccination clinics, stress reduction programs, and training or coaching to help employees meet their health goals.

Similarly, both law and practice concerning more traditional benefits, such as sick leave, have evolved in the decades since the Department first promulgated part 778. For example, instead of providing separate paid time off for illness and vacation, many employers now combine these and other types of leave into paid time off plans. Moreover, in recent years, a number of state and local governments have passed laws requiring employers to provide paid sick leave.1

Recently, several states and cities have also begun considering and implementing scheduling laws.2 Some of these laws expressly assert that the penalties are not part of the regular rate under state law, and employers may be confused as they try to determine how these and other penalties may affect regular rate calculations under federal law.

In this NPRM, the Department is updating the regulations to reflect these and other such developments in the 21st-century workplace.



Footnotes

1 In 2011, for example, Connecticut became the first state to require private-sector employers to provide paid sick leave to their employees. Today, 11 states, the District of Columbia, and various cities and counties require paid sick leave, and many other states are considering similar requirements.

2 In the last 5 years, for example, New York, San Francisco, Seattle, and other cities have enacted laws imposing penalties on employers that change employees’ schedules without the requisite notice, and various state governments are considering and beginning to pass similar scheduling legislation.


Q. What are the proposed changes to the regulations?

The NPRM focuses primarily on clarifying whether certain kinds of perks, benefits or other miscellaneous payments must be included in the regular rate. In relevant part, the Department proposes clarifications to the current regulations to confirm the following:

  • that the cost of providing wellness programs, onsite specialist treatment, gym access and fitness classes, and employee discounts on retail goods and services may be excluded from an employee’s regular rate of pay;
  • that payments for unused paid leave, including paid sick leave, may be excluded from an employee’s regular rate of pay;
  • that reimbursed expenses need not be incurred “solely” for the employer’s benefit for the reimbursements to be excludable from an employee’s regular rate;
  • that reimbursed travel expenses that do not exceed the maximum travel reimbursement permitted under the Federal Travel Regulation System and meets other regulatory requirements may be excluded from an employee’s regular rate of pay;
  • that employers do not need a prior formal contract or agreement with the employee(s) to exclude certain overtime premiums described in sections 7(e)(5) and (6) of the FLSA; and
  • that pay for time that would not otherwise qualify as “hours worked,” including bona fide meal periods, may be excluded from an employee’s regular rate unless an agreement or established practice indicates that the parties have treated the time as hours worked.

The Department also proposes to provide examples of discretionary bonuses that may be excluded from an employee’s regular rate of pay under section 7(e)(3) of the FLSA and to clarify that the label given a bonus does not determine whether it is discretionary. The Department also proposes to provide additional examples of benefit plans, including accident, unemployment, and legal services, that may be excluded from an employee’s regular rate of pay under section 7(e)(4) of the FLSA. Additionally, the Department proposes to clarify that tuition programs, such as reimbursement programs or repayment of educational debt, could be excludable under several different provisions of section 7(e).

Finally, the Department proposes two substantive changes to the existing regulations. First, the Department proposes to eliminate the restriction in §§ 778.221 and 778.222 that “call-back” pay and other payments similar to call-back pay must be “infrequent and sporadic” to be excludable from an employee’s regular rate, while maintaining that such payments must not be so regular that they are essentially prearranged. Second, the Department proposes an update to its “basic rate” regulations, which is authorized under section 7(g)(3) of the FLSA as an alternative to the regular rate under specific circumstances. Under the current regulations, employers using an authorized basic rate may exclude from the overtime computation any additional payment that would not increase total overtime compensation by more than $0.50 a week on average for overtime workweeks in the period for which the employer makes the payment. The Department’s proposal would update this regulation to change the $0.50 limit to 40 percent of the federal minimum wage—currently $2.90.

Q. What is the estimated economic impact of the proposed rule?

The Department estimates that the proposed rule, if finalized, would result in one-time regulatory familiarization costs of $36.4 million. However, the proposed rule would not impose any new requirements on employers or require any affirmative measures for regulated entities to come into compliance. Therefore, there are no other costs attributable to this deregulatory proposed rule.

The Department expects that the proposed rule will encourage some employers to start providing certain benefits that they may presently refrain from providing due to apprehension about potential overtime consequences, which in turn might have a positive impact on workplace morale, employee compensation, and employee retention. The Department was unable to quantify such potential benefits and invites comment from the public regarding possible effects of the proposed rule.