[co-author: Jamie Moelis*]

On December 12, 2019, for the first time in 60 years, the U.S. Department of Labor (DOL) announced a final rule clarifying the types of benefits that must be included in determining an employee’s “regular rate of pay” when calculating overtime wages. This new rule becomes effective January 15, 2020.

The Fair Labor Standards Act (FLSA) requires that non-exempt employees – employees who are eligible for overtime pay – be paid at least one-and-one half times their regular rate of pay for all hours worked over 40 in a workweek. The FLSA defines the regular rate as “all remuneration for employment paid to, or on behalf of, the employee” subject to certain exclusions outlined in section 7(e) of the FLSA. As employers have expanded the kinds of benefits they offer in recent years, it has become unclear which benefits need to be included and which can be excluded in determining an employee’s regular rate of pay.

The new rule clarifies that employers may exclude the following benefits when calculating an employee’s regular rate of pay:

• The cost of providing certain parking benefits, wellness programs, onsite specialist treatment, gym access and fitness classes, employee discounts on retail goods and services, certain tuition benefits (whether paid to an employee, an education provider, or a student-loan program), and adoption assistance;
• Payments for unused paid leave, including paid sick leave or paid time off;
• Payments of certain penalties required under state and local scheduling laws;
• Reimbursed expenses including cellphone plans, credentialing exam fees, organization membership dues, and travel, even if not incurred “solely” for the employer’s benefit;
• Certain sign-on bonuses and certain longevity bonuses;
• The cost of office coffee and snacks to employees as gifts;
• Discretionary bonuses (the final rule clarifies that the label given to a bonus does not determine whether it is discretionary); and
• Contributions to benefit plans for accident, unemployment, legal services, or other events that could cause future financial hardship or expense.

As a result of the final rule, employers may provide these benefits to non-exempt employees without including them in the calculation of their regular rate of pay for overtime purposes. Employers should review the final rule carefully to determine whether any of the clarifications are applicable to their workforce. We will continue monitoring developments in this area and will provide updates as new information becomes available.

*Jamie Moelis is a law clerk in Sheppard Mullin’s New York office.