Regular Rate Under the Fair Labor Standards Act
| Published date | 29 March 2019 |
| Citation | 84 FR 11888 |
| Record Number | 2019-05687 |
| Section | Proposed rules |
| Court | Wage And Hour Division |
Federal Register, Volume 84 Issue 61 (Friday, March 29, 2019)
[Federal Register Volume 84, Number 61 (Friday, March 29, 2019)]
[Proposed Rules]
[Pages 11888-11912]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-05687]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 84, No. 61 / Friday, March 29, 2019 /
Proposed Rules
[[Page 11888]]
DEPARTMENT OF LABOR
Wage and Hour Division
29 CFR Parts 548 and 778
RIN 1235-AA24
Regular Rate Under the Fair Labor Standards Act
AGENCY: Wage and Hour Division, Department of Labor.
ACTION: Notice of proposed rulemaking and request for comments.
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SUMMARY: The Fair Labor Standards Act (FLSA or Act) generally requires
that covered, nonexempt employees receive overtime pay of at least one
and one-half times their regular rate of pay for time worked in excess
of 40 hours per workweek. The regular rate includes all remuneration
for employment, subject to the exclusions outlined in section 7(e) of
the FLSA. Part 778 of Title 29, Code of Federal Regulations (CFR),
contains the Department of Labor's (Department) official interpretation
of the overtime compensation requirements in section 7 of the FLSA,
including requirements for calculating the regular rate. Part 548 of
Title 29 implements section 7(g)(3) of the FLSA, which permits
employers, under specific circumstances, to use a basic rate to compute
overtime compensation rather than a regular rate. The Department has
not updated many of these regulations, however, in more than half a
century--even though compensation practices have evolved significantly.
In this Notice of Proposed Rulemaking (NPRM), the Department proposes
updates to a number of regulations both to provide clarity and better
reflect the 21st-century workplace. These proposed changes would
promote compliance with the FLSA; provide appropriate and updated
guidance in an area of evolving law and practice; and encourage
employers to provide additional and innovative benefits to workers
without fear of costly litigation.
DATES: Submit written comments on or before May 28, 2019.
ADDRESSES: You may submit comments, identified by Regulatory
Information Number (RIN) 1235-AA24, by either of the following methods:
Electronic Comments: Submit comments through the Federal eRulemaking
Portal at http://www.regulations.gov. Follow the instructions for
submitting comments. Mail: Address written submissions to Division of
Regulations, Legislation, and Interpretation, Wage and Hour Division,
U.S. Department of Labor, Room S-3502, 200 Constitution Avenue NW,
Washington, DC 20210. Instructions: Please submit only one copy of your
comments by only one method. All submissions must include the agency
name and RIN, identified above, for this rulemaking. Please be advised
that comments received will become a matter of public record and will
be posted without change to http://www.regulations.gov, including any
personal information provided. All comments must be received by 11:59
p.m. on the date indicated for consideration in this rulemaking.
Commenters should transmit comments early to ensure timely receipt
prior to the close of the comment period, as the Department continues
to experience delays in the receipt of mail. Submit only one copy of
your comments by only one method. Docket: For access to the docket to
read background documents or comments, go to the Federal eRulemaking
Portal at http://www.regulations.gov.
FOR FURTHER INFORMATION CONTACT: Melissa Smith, Director of the
Division of Regulations, Legislation, and Interpretation, Wage and Hour
Division, U.S. Department of Labor, Room S-3502, 200 Constitution
Avenue NW, Washington, DC 20210; telephone: (202) 693-0406 (this is not
a toll-free number). Copies of this NPRM may be obtained in alternative
formats (Large Print, Braille, Audio Tape or Disc), upon request, by
calling (202) 693-0675 (this is not a toll-free number). TTY/TDD
callers may dial toll-free 1-877-889-5627 to obtain information or
request materials in alternative formats. Questions of interpretation
and/or enforcement of the agency's regulations may be directed to the
nearest WHD district office. Locate the nearest office by calling WHD's
toll-free help line at (866) 4US-WAGE ((866) 487-9243) between 8 a.m.
and 5 p.m. in your local time zone, or log onto WHD's website for a
nationwide listing of WHD district and area offices at http://www.dol.gov/whd/america2.htm.
Electronic Access and Filing Comments: This proposed rule and
supporting documents are available through the Federal Register and the
http://www.regulations.gov website. You may also access this document
via WHD's website at http://www.dol.gov/whd/. To comment electronically
on Federal rulemakings, go to the Federal eRulemaking Portal at http://www.regulations.gov, which will allow you to find, review, and submit
comments on Federal documents that are open for comment and published
in the Federal Register. You must identify all comments submitted by
including ``RIN 1235-AA24'' in your submission. Commenters should
transmit comments early to ensure timely receipt prior to the close of
the comment period (11:59 p.m. on the date identified above in the
DATES section); comments received after the comment period closes will
not be considered. Submit only one copy of your comments by only one
method. Please be advised that all comments received will be posted
without change to http://www.regulations.gov, including any personal
information provided.
SUPPLEMENTARY INFORMATION:
I. Executive Summary
The FLSA generally requires covered employers to pay nonexempt
employees overtime pay of at least one and one-half times their regular
rate for hours worked in excess of 40 per workweek. The FLSA defines
the regular rate as ``all remuneration for employment paid to, or on
behalf of, the employee''--subject to eight exclusions established in
section 7(e).\1\ Parts 548 and 778 of CFR Title 29 contain the
regulations addressing the overtime compensation requirements in
section 7 of the FLSA, including requirements for calculating the
regular rate of pay.
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\1\ See 29 U.S.C. 207(e).
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The Department promulgated the majority of part 778 more than 60
years ago, when typical compensation often consisted predominantly of
traditional wages; paid time off for holidays and vacations; and
contributions to basic medical, life insurance, and disability
[[Page 11889]]
benefits plans.\2\ Since that time, the workplace and the law have
changed.
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\2\ See Bureau of Labor Statistics, An Overview of Employee
Benefits 20 (2005), https://www.bls.gov/careeroutlook/2005/summer/art02.pdf.
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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.
Both law and practice concerning more traditional benefits, such as
sick leave, have likewise 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. In 2011, for example,
Connecticut became the first state to require private-sector employers
to provide paid sick leave to their employees.\3\ Today, 11 states, the
District of Columbia,\4\ and various cities and counties \5\ require
paid sick leave, and many other states are considering similar
requirements.
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\3\ See Conn. Gen. Stat. P.A. 11-52.
\4\ See Ariz. Title 23, Ch. 2, art. 8, Sec. Sec. 23-363, 23-
364, & art. 8.1; Cal. Labor Code Sec. Sec. 245, 2810.5; Conn. Gen.
Stat. P.A. 11-52; D.C. Code Sec. 32-131.01 et seq.; Md. Code Ann.
HB 0001; Mass. Gen. Laws ch. 149, Sec. 148(c), (d); Mich. Comp.
Laws Sec. Sec. 408.961-974 (effective Mar. 29, 2019); N.J. A1827;
Or. Rev. Stat. Sec. Sec. 653.256, 659A.885; R.I. Gen. Laws Title
28, Ch. 28-57; 21 Vt. Stat. Sec. Sec. 384, 481-485, 345; 29 Vt.
Stat. Sec. 161; Wash. Rev. Code Sec. Sec. 49.46.005, 49.46.020,
49.46.090, 49.46.100.
\5\ See, e.g., Austin, Tex., City Code 4-19 (2018); Minneapolis,
Minn., Admin. Code. 40.10 (2016); Phila., Pa., Admin. Code 9-4100
(2015); N.Y.C., N.Y., Admin. Code 20-911 (2013); Seattle, Wash.,
Mun. Code. 14.16 (2011).
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Recently, several states and cities have also begun considering and
implementing scheduling laws. 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.\6\
Some of these laws expressly assert that the penalties are not part of
the regular rate under state law,\7\ but confusion abounds for
employers trying to determine how these and other penalties may affect
regular rate calculations under federal law.
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\6\ See N.Y.C., N.Y., Admin. Code 20-1201 (2017); Seattle,
Wash., Mun. Code 14.22.050 (2017); SB 828, 73rd Leg. Assemb., 2017
Reg. Sess. (Or. 2017); see also Emeryville, Cal., Mun. Code 5-39.01
(2017); S.F., Cal., Police Code art. 33G (2015).
\7\ See, e.g., Employee Scheduling (Call-in Pay), N.Y. St. Reg.
LAB. 47-17-00011-P, at Sec. 142-2.3(a)(2) (proposed November 11,
2017) (``Minimum rate. Payments for other hours of call-in pay shall
be calculated at the basic minimum hourly rate with no allowances.
Such payments are not payments for time worked or work performed and
need not be included in the regular rate for purposes of calculating
overtime pay.''); Or. Rev. Stat. Ann. Sec. 653.412(7)(d) (effective
July 1, 2018) (``Regular rate of pay'' does not include ``[a]ny
additional compensation an employer is required to pay an employee
under ORS 653.442 [right to rest between work shifts] or 653.455
[compensation for work schedule changes].'').
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The Department believes that its current regulations do not
sufficiently reflect these and other such developments in the 21st-
century workplace. In this NPRM, the Department proposes to update its
regulations in part 778 to reflect these changes in the modern
workplace and to provide clarifications that reflect the statutory
language and WHD's enforcement practices. In so doing, the Department
intends to promote compliance with the FLSA; provide appropriate and
updated guidance to employers with evolving worker benefits, including
employers that offer paid leave; give clarity concerning the proper
treatment of scheduling-penalty payments under the FLSA; and encourage
employers to provide additional and more creative benefits without fear
of costly litigation.
The proposed rule would clarify when unused paid leave, bona fide
meal periods, reimbursements, benefit plans, and certain ancillary
benefits may be excluded from the regular rate. The proposed rule would
also revise certain sections of the regulation to adhere more closely
to the Act. Additionally, the Department proposes minor clarifications
and updates to part 548 of Title 29, which implements section 7(g)(3)
of the FLSA. Section 7(g)(3) permits employers, under specific
circumstances, to use a basic rate to compute overtime compensation
rather than a regular rate.\8\ The Department invites comments from the
public on all aspects of this NPRM. The Department estimates below the
economic effects of this rule. The Department estimates qualitatively
the potential benefits associated with reduced litigation at $281
million over 10 years, or $28.1 million per year. The Department also
estimates that this proposed rule, if finalized, would result in one-
time regulatory familiarization costs of $36.4 million, which results
in a 10-year annualized cost of $4.1 million at a discount rate of 3
percent or $4 million at a discount rate of 7 percent.
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\8\ See 29 U.S.C. 207(g)(3).
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This proposed rule is an Executive Order (E.O.) 13771 deregulatory
action. Additional details on the estimated reduced burdens and cost
savings of this proposed rule can be found in the rule's economic
analysis.
II. Background
Congress enacted the FLSA in 1938 to remedy ``labor conditions
detrimental to the maintenance of the minimum standard of living
necessary for health, efficiency, and the general well-being of
workers[,]'' which burdened commerce and constituted unfair methods of
competition.\9\ In relevant part, section 7(a) of the FLSA requires
employers to pay their employees overtime at one and one-half times
their ``regular rate'' of pay for time worked in excess of 40 hours per
workweek.\10\ The FLSA, however, did not define the term ``regular
rate'' when enacted.
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\9\ 29 U.S.C. 202(a); see Fair Labor Standards Act of 1938,
Public Law 75-718, ch. 676, 52 Stat. 1060 (codified as amended at 29
U.S.C. Sec. Sec. 201-219).
\10\ 29 U.S.C. 207(a). The statutory maximum in 1938 was 44
hours per workweek; in 1939, it was 42 hours per workweek; and in
1940, it was 40 hours per workweek. See Public Law 75-718, 52 Stat.
at 1063.
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Later that year, WHD issued an interpretive bulletin addressing the
meaning of ``regular rate,'' which WHD later revised and updated in
1939 and 1940. The 1940 version of the bulletin stated, among other
things, that an employer did not need to include extra compensation
paid for overtime work in regular rate calculations.\11\ It also
specified that the regular rate must be ``the rate at which the
employee is actually employed and paid and not upon a fictitious rate
which the employer adopts solely for bookkeeping purposes.'' \12\
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\11\ See Interpretive Bulletin No. 4 ] 13 (Nov. 1940).
\12\ Id. at ] 18.
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In 1948, the Supreme Court in Bay Ridge Operating Co. v. Aaron, 334
U.S. 446, addressed whether specific types of compensation may be
excluded from the regular rate, or even credited towards an employer's
overtime payment obligations. The Court held that an overtime premium
payment, which it defined as ``extra pay for work because of previous
work for a specified number of hours in the workweek or workday whether
the hours are specified by contract or statute,'' could be excluded
from the computation of the regular rate.\13\ Permitting ``an overtime
premium to enter into the computation of the regular rate would be to
allow
[[Page 11890]]
overtime premium on overtime premium--a pyramiding that Congress could
not have intended.'' \14\ The Court also held that ``any overtime
premium paid, even if for work during the first forty hours of the
workweek, may be credited against any obligation to pay statutory
excess compensation.'' \15\ By contrast, the Court noted, ``[w]here an
employee receives a higher wage or rate because of undesirable hours or
disagreeable work, such wage represents a shift differential or higher
wages because of the character of work done or the time at which he is
required to labor rather than an overtime premium. Such payments enter
into the determination of the regular rate of pay.'' \16\
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\13\ 334 U.S. at 450 n.3, 465-66.
\14\ Id. at 464.
\15\ Id. at 464-65.
\16\ Id. at 468-69.
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After the Bay Ridge decision, in 1948 the Department promulgated 29
CFR part 778, concerning the regular rate.\17\ This regulation codified
the principles from Bay Ridge that extra payments for hours worked in
excess of a daily or weekly standard established by contract or statute
may be excluded from the regular rate and credited toward overtime
compensation due, and that extra payments for work on Saturdays,
Sundays, holidays, or at night that are made without regard to the
number of hours or days previously worked in the day or workweek must
be included in the regular rate and may not be credited toward the
overtime owed.\18\ It noted, however, that when extra payments for work
on Saturdays, Sundays, holidays, or nights are contingent on the
employee having previously worked a specified standard number of hours
or days, such payments are true overtime premium payments that may be
excluded from the regular rate and credited toward overtime
compensation due.\19\ The Department also explained that payments
``that are not made for hours worked, such as payments for idle
holidays or for an occasional absence due to vacation or illness or
other similar cause'' may be excluded from the regular rate, but could
not be credited against statutory overtime compensation due.\20\
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\17\ See 13 FR 4534 (Aug. 6, 1948).
\18\ See 29 CFR 778.2 (1948).
\19\ See id.
\20\ Id.
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Congress responded to the Bay Ridge decision in 1949 by amending
the FLSA to identify two categories of payments that could be excluded
from the regular rate and, in addition, credited toward overtime
compensation due.\21\ The first category was extra compensation for
work on Saturdays, Sundays, holidays, or the sixth or seventh day of
the workweek paid at a premium rate of one and one-half times the rate
paid for like work performed in nonovertime hours on other days. The
second category was extra compensation paid pursuant to an applicable
employment contract or collective bargaining agreement for work outside
of the hours established therein as the normal workday (not exceeding
eight hours) or workweek (not exceeding 40 hours) at a premium rate of
one and one-half times the rate paid for like work performed during the
workday or workweek.\22\
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\21\ See Public Law 81-177, ch. 352, 63 Stat. 446 (July 20,
1949). These provisions are currently codified at 29 U.S.C.
207(e)(6)-(7).
\22\ See id.
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On October 26, 1949, Congress again amended the FLSA.\23\ The
amendments added, among other things, a comprehensive definition of the
term ``regular rate.'' \24\ ``Regular rate'' was defined to include
``all remuneration for employment paid to, or on behalf of, the
employee[,]'' \25\ with the exception of an exhaustive list of seven
specific categories of payments that could be excluded from the regular
rate.\26\ Those categories of excludable payments were: (1) Gifts and
payments on special occasions; (2) payments made for occasional periods
when no work is performed such as vacation or sick pay, reimbursements
for work-related expenses, and other similar payments that are not
compensation for hours of employment; (3) discretionary bonuses,
payments to profit-sharing or thrift or savings plans that meet certain
requirements, and certain talent fees; (4) contributions to a bona fide
plan for retirement, or life, accident, or health insurance; (5) extra
compensation provided by a premium rate for certain hours worked in
excess of eight in a day, 40 hours in a workweek, or the employee's
normal working hours; (6) extra compensation provided by a premium rate
for work on Saturdays, Sundays, regular days of rest, or the sixth or
seventh days of the workweek; and (7) extra compensation provided by a
premium rate pursuant to an employment contract or collective
bargaining agreement for work outside of the hours established therein
as the normal workday (not exceeding eight hours) or workweek (not
exceeding 40 hours).\27\ The October 1949 amendments also added a
provision specifying that the last three of these categories are
creditable against overtime compensation due.\28\
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\23\ See Fair Labor Standards Amendments of 1949, Public Law 81-
393, ch. 736, 63 Stat. 910.
\24\ Id. Sec. 7, 63 Stat. at 913. This provision is currently
codified at 29 U.S.C. 207(e).
\25\ Id.
\26\ See id., 63 Stat. at 913-14. These provisions are currently
codified at 29 U.S.C. 207(e)(1)-(7).
\27\ See id. The excludable categories of payments in sections
7(d)(6) and (7) in the October 1949 amendments were essentially the
same as those that had been added in the July 1949 amendments as
sections 7(e)(1) and (2); the October 1949 amendments eliminated
them from section 7(e).
\28\ See id., Public Law 81-393, 63 Stat. at 915. This provision
is currently codified at 29 U.S.C. 207(h) (payments described in
sections 7(e)(5)-(7) are creditable).
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In 1950, the Department updated part 778 to account for the 1949
amendments to the FLSA.\29\ These regulations explained general
principles regarding overtime compensation and the regular rate,
including the principle that each workweek stands on its own for
purposes of determining the regular rate and overtime due.\30\ The
regulations also provided methods for calculating the regular rate
under different compensation systems, such as salary and piecework
compensation.\31\ They further elaborated on the seven categories of
payments that are excludable from regular rate calculations, and
provided several examples.\32\ The regulations also addressed special
problems and pay plans designed to circumvent the FLSA.\33\
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\29\ See 15 FR 623 (Feb. 4, 1950) (codified at 29 CFR
778.0-.27).
\30\ See 29 CFR 778.2 (1950).
\31\ See 29 CFR 778.3(b) (1950).
\32\ See 29 CFR 778.5-.8 (1950).
\33\ See 29 CFR 778.9.17, .21-.23 (1950).
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In 1961 and 1966, Congress made a few minor, nonsubstantive
language changes and redesignated certain sections.\34\ In 1968, the
Department updated part 778, principally to clarify the statutory
references, update the amounts used to illustrate pay computations, and
reorganize the provisions in part 778.\35\ Over the next several
decades, the Department periodically made minor changes and updates to
part 778.\36\
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\34\ In 1961, Congress made nonsubstantive language changes to
sections (d)(5) and (7). See Fair Labor Standards Amendments of
1961, Public Law 87-30, 6, 75 Stat. 65, 70. In 1966, Congress
redesignated section 7(d) as section 7(e). See Fair Labor Standards
Amendments of 1966, Public Law 89-601, Title II, Sec. 204(d)(1), 80
Stat. 830, 836. Additionally, section 7(g), which provided that
extra compensation paid pursuant to sections 7(d)(5), (6), and (7)
could be credited against overtime compensation due under section
7(a), was moved to section 7(h). See id.
\35\ See 33 FR 986 (Jan. 26, 1968) (29 CFR 778.0-.603).
\36\ See 36 FR 4699 (Mar. 11, 1971) (updating Sec. 778.214 to
clarify that advance approval by the Department is not required for
plans providing benefits within the meaning of section 7(e)(4)); 36
FR 4981 (Mar. 16, 1971) (updating Sec. 778.117 to clarify
commission payments that must be included in the regular rate); 46
FR 7308 (Jan. 23, 1981) (updating part 778 to increase the dollar
amounts used as examples in the regulations, to respond to statutory
amendments affecting other parts of the FLSA, and to modify Sec.
778.320 to clarify that pay for nonworking time does not
automatically convert such time into hours worked); 46 FR 33516
(June 30, 1981) (correcting errors in the January 1981 update in
Sec. Sec. 778.323, .327, .501, .601); 56 FR 61100 (Nov. 29, 1991)
(updating Sec. 778.603 to address statutory amendment adding
section 7(q) regarding maximum-hour exemption for employees
receiving remedial education).
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[[Page 11891]]
In 2000, Congress added one additional category of payments that
could be excluded from the regular rate, currently found in section
7(e)(8).\37\ This amendment permitted an employer to exclude from the
regular rate income derived from a stock option, stock appreciation
right, or employee stock purchase plan, provided certain restrictions
were met.\38\ In the 2000 amendments, Congress also amended section
7(h) to state that, except for the types of extra compensation
identified in sections 7(e)(5), (6), and (7), sums excluded from the
regular rate are not creditable toward minimum wage or overtime
compensation due.\39\ In 2011, the Department updated part 778 to
reflect the 2000 statutory amendments and to modify the wage rates used
as examples to reflect the current minimum wage.\40\
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\37\ See Worker Economic Opportunity Act, Public Law 106-202,
2(a)(3), 114 Stat. 308 (2000).
\38\ See id.
\39\ See id.
\40\ See 76 FR 18832 (Apr. 5, 2011) (updating Sec. Sec.
778.110, .111, .113, .114, .200, .208).
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Currently, the FLSA's definition of ``regular rate'' and the eight
categories of excludable payments are contained in section 7(e) of the
Act.\41\ The Department's regulations concerning the regular rate
requirements are contained in 29 CFR part 778. As noted above, the last
comprehensive revision to part 778 was in 1968.\42\
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\41\ See 29 U.S.C. 207(e). Additionally, section 7(h) states
that only payments excludable from the regular rate pursuant to
sections 7(e)(5), (6), and (7) may be credited against the
employer's overtime obligation and that all other excludable
payments (i.e., payments that qualify as excludable under sections
7(e)(1), (2), (3), (4), and (8)) are not creditable. See 29 U.S.C.
207(h).
\42\ See 33 FR 986 (29 CFR 778.0-.603).
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Under certain circumstances, the FLSA permits employers to use a
``basic rate,'' rather than the regular rate as defined in section
7(e), to calculate overtime compensation.\43\ Congress added this
provision, which is currently in section 7(g), in 1949 (at the same
time that Congress added the definition of ``regular rate'' to the
FLSA).\44\ The requirements an employer must meet to use a basic rate
are set forth in that same section 7(g).\45\
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\43\ 29 U.S.C. 207(g).
\44\ See Public Law 81-393, 63 Stat. at 914-15. In 1966,
Congress redesignated section 7(f) as section 7(g), with section
numbers (1)-(3) remaining the same; no substantive changes were
made. See Public Law 89-601, 80 Stat. at 836. 1 29 U.S.C. 207(g)(1)-
(3).
\45\ See id.
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In 1955, the Department promulgated 29 CFR part 548 to establish
the requirements for authorized basic rates under section 7(g)(3).\46\
It amended various sections of the part 548 regulations several times
over the next 12 years to reflect statutory amendments to other parts
of the FLSA, including increases to the minimum wage.\47\ The
Department has not updated any of the regulations in part 548 since
1967, more than a half-century ago.
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\46\ See 20 FR 5679 (Aug. 6, 1955). The regulations interpreting
sections 7(g)(1)-(2) are at 29 CFR 778.415-.421.
\47\ See 21 FR 338 (Jan. 18, 1956); 26 FR 7731 (Aug. 18, 1961);
28 FR 11266 (Oct. 22, 1963); 31 FR 6769 (May 6, 1966); 32 FR 3293
(Feb. 25, 1967).
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III. Proposed Regulatory Revisions
The Department proposes to update regulations in part 778 and part
548 to both clarify the Department's interpretations in light of modern
compensation and benefits practices. The sections below discuss, in
turn, each category of excludable compensation that the Department
proposes to address.
A. Excludable Compensation Under Section 7(e)(2)
Many of the proposed updates would clarify the type of compensation
that is excludable from the regular rate under FLSA section 7(e)(2).
Section 7(e)(2) permits an employer to exclude from the regular rate
three categories of payments: First, ``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''; second, ``reasonable payments for traveling expenses, or other
expenses, incurred by an employee in the furtherance of his employer's
interests and properly reimbursable by the employer''; and third,
``other similar payments to an employee which are not made as
compensation for his hours of employment.'' \48\
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\48\ 29 U.S.C. 207(e)(2).
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Section 7(e)(2) contains three separate clauses, each of which
addresses a distinct category of excludable compensation. For purposes
of this NPRM, the Department will refer to these clauses as the
``occasional periods when no work is performed'' clause; the
``reimbursable expenses'' clause; and the ``other similar payments''
clause. The Department's regulations interpreting section 7(e)(2) are
contained in Sec. Sec. 778.216-.224.
1. Pay for Forgoing Holidays or Leave
The initial clause of section 7(e)(2) permits an employer to
exclude ``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'' from the regular
rate.\49\ Section 778.218 addresses this statutory provision and
provides that when payments for such time ``are in amounts
approximately equivalent to the employee's normal earnings,'' they are
not compensation for hours of employment and are therefore excludable
from the regular rate.\50\
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\49\ 29 U.S.C. 207(e)(2).
\50\ 29 CFR 778.218(a). See FOH 32d03g (``Payment for absences
charged against leave under a bona fide plan granting the employee a
specified amount of annual, vacation, or sick leave with pay need
not be included in the regular rate of pay, if the sum paid is the
approximate equivalent of the employee's normal earnings for a
similar period of working time. Payments for such absences may be
excluded regardless of when or how the leave is taken.'').
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Section 778.219 addresses a related issue, the exclusion of
payments for working on a holiday or forgoing vacation leave, as
distinct from the exclusion of payments for using leave.\51\ It
explains that if an employee who is entitled to ``a certain sum as
holiday or vacation pay, whether he works or not,'' receives additional
pay for each hour worked on a holiday or vacation day, the sum
allocable as the holiday or vacation pay is excluded from the regular
rate.\52\ In other words, when an employee works instead of taking a
holiday or using vacation leave, and receives pay for the holiday or
vacation leave that he or she did not take in addition to receiving pay
for the hours of work performed, the amount paid for the forgone
holiday or vacation leave may be excluded from the regular rate.
Section 778.219 addresses only pay for forgoing holidays and vacation
leave; it does not address sums paid for forgoing the use of other
forms of leave, such as leave for illness.
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\51\ See 29 CFR 778.219.
\52\ 29 CFR 778.219(a).
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WHD has addressed payment for forgoing sick leave in its Field
Operations Handbook (FOH). The FOH states that the same rules governing
exclusion of payments for unused vacation leave also apply to payments
for unused sick leave.\53\ Accordingly, when ``the sum paid for unused
sick leave is the approximate equivalent of the employee's normal
earnings for a similar period of working time,'' such
[[Page 11892]]
payments are excludable from the regular rate.\54\
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\53\ See FOH 32d03e.
\54\ Id.
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To clarify and modernize the regulations, the Department proposes
to update Sec. 778.219 to address payments for forgoing both holidays
and other forms of leave. The Department is aware that many employers
no longer provide separate categories of leave based on an employee's
reason for taking leave--such as sick leave and vacation leave.
Instead, employers provide one category of leave, which is commonly
called paid time off. The Department sees no reason to distinguish
between the types of leave when determining whether payment for
forgoing use of the leave is excludable from the regular rate. Rather,
the central issues are whether the amount paid is approximately
equivalent to the employee's normal earnings for a similar period of
time, and whether the payment is in addition to the employee's normal
compensation for hours worked.
Accordingly, the Department proposes to clarify that occasional
payments for forgoing the use of leave are treated the same regardless
of the type of leave. The Department therefore proposes to revise the
title of Sec. 778.219, clarify in Sec. 778.219(a) that payments for
all forms of unused leave are treated the same for purposes of
determining whether they may be excluded from the regular rate, and add
an example concerning payment for forgoing the use of paid time off.
The proposed changes reflect the Department's longstanding practice of
applying the same principles to payments of unused holiday, vacation,
and sick leave.\55\ The proposed changes would ensure the consistent
application of the same principles across differing leave
arrangements.\56\ The Department also proposes to clarify that payments
for forgoing the use of leave are excludable from the regular rate
regardless of whether they are paid during the same pay period in which
the previously scheduled leave is forgone or during a subsequent pay
period as a lump sum.\57\
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\55\ See id.
\56\ See, e.g., Balestrieri v. Menlo Park Fire Protec. Dist.,
800 F.3d 1094, 1103 (9th Cir. 2015) (holding that annual leave
comprised of both sick and vacation leave need not be included in
the regular rate under section 7(e)(2)). Such payments need not be
included in the regular rate under section 7(e)(2) for the same
reason that payments for unused vacations or holidays need not be
included; it makes no difference that payments for unused annual
leave or paid time off may include unused sick leave. See also
Opinion Letter FLSA2006-18NA, 2006 WL 4512960 (July 24, 2006)
(holiday payments made to employees when they forgo holidays need
not be included in the regular rate pursuant to section 7(e)(2));
Opinion Letter FLSA2004-2NA, 2004 WL 5303030 (Apr. 5, 2004) (cashed-
out accrued vacation time need not be included in regular rate
pursuant to section 7(e)(2)).
\57\ In some situations, employers may make payments to
encourage attendance at work rather than compensating employees for
forgoing the use of leave. Section 7(e)(3)(a) permits the exclusion
of discretionary bonuses from the regular rate, but requires, among
other things, that such bonus not be made ``pursuant to any prior
contract, agreement, or promise causing the employee to expect such
payments regularly[.]'' 29 U.S.C. 207(e)(3). As an example, Sec.
778.211(c) states that an attendance bonus promised to employees to
induce them to remain with the firm or to work more steadily,
rapidly, or efficiently is not excludable from the regular rate. The
proposed clarification to Sec. 778.219(a) would not affect Sec.
778.211(c), which addresses the exclusion of discretionary bonuses
from the regular rate pursuant to FLSA section 7(e)(3)(a). See 29
U.S.C. 207(e)(3)(a); 29 CFR 778.211(c). The facts of each case
determine whether a payment is, in fact, for unused leave and
therefore excludable or whether the payment is made as an attendance
bonus that is required to be included in the regular rate. For
example, WHD has stated in guidance that where a collective
bargaining agreement provided that `` `[a]ll employees will be
eligible for a stipend for perfect attendance,' '' the payment,
although described as a ``stipend for nonuse of sick leave,'' in
fact constituted an attendance bonus under Sec. 778.211(c) and
therefore was required to be included in the regular rate. Opinion
Letter FLSA2009-19, 2009 WL 649021 (Jan. 16, 2009).
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2. Compensation for Bona Fide Meal Periods
As noted above, Sec. 778.218 addresses the clause of FLSA section
7(e)(2) concerning payments made for occasional periods when no work is
performed and provides that when payments for such time ``are in
amounts approximately equivalent to the employee's normal earnings,''
they are not compensation for hours of employment and may be excluded
from the regular rate.\58\ Section 778.218(b) states that this clause
``deals with the type of absences which are infrequent or sporadic or
unpredictable'' and ``has no relation to regular `absences' such as
lunch periods nor to regularly scheduled days of rest.'' \59\
---------------------------------------------------------------------------
\58\ 29 CFR 778.218; see 29 U.S.C. 207(e)(2).
\59\ 29 CFR 778.218(b).
---------------------------------------------------------------------------
Section 778.320 addresses ``hours that would not be hours worked if
not paid for,'' and identifies ``time spent in eating meals between
working hours'' as an example.\60\ Section 778.320(b) further states
that even when such time is compensated, the parties may agree that the
time will not be counted as hours worked.
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\60\ See 29 CFR 778.320.
---------------------------------------------------------------------------
The Department proposes to remove the reference to ``lunch
periods'' in Sec. 778.218(b) to eliminate any uncertainty about its
relation to Sec. 778.320 concerning the excludability of payments for
bona fide meal periods from the regular rate. As one court noted, the
existing regulations in Sec. Sec. 778.218 and 778.320 ``appear
somewhat inconsistent'' on the excludability from the regular rate of
compensation for bona fide meal periods.\61\ In 1986, WHD acknowledged
in an opinion letter ``that the reference to meal periods in section
778.218(b) of Part 778 may not be compatible with the position which is
contained in section 778.320(b),'' and indicated that the issue was
under review.\62\ The Department subsequently clarified in a 1996
opinion letter that pay provided for a bona fide meal period is
excludable from the regular rate under Sec. 778.320(b).\63\ While the
Department clarified its position in an opinion letter more than 20
years ago, the Department is nonetheless concerned that the language in
Sec. 778.218(b) may cause confusion concerning the excludability of
pay for bona fide meal periods. Thus, to remove any ambiguity and to
codify its interpretation in regulation, the Department proposes to
delete the reference to ``lunch periods'' from Sec. 778.218(b).
---------------------------------------------------------------------------
\61\ Smiley, 839 F.3d at 331 n.5.
\62\ WHD Opinion Letter FLSA-937 (July 22, 1986).
\63\ See WHD Opinion Letter, 1996 WL 1031805 (Dec. 3, 1996); see
also Ballaris v. Wacker Siltronic Corp., 370 F.3d 901, 909 (9th Cir.
2004) (holding that pay for a bona fide lunch period was ``properly
excluded from the calculation of the regular rate under 29 U.S.C.
207(e)(2) as interpreted by revised section 778.320''); WHD Opinion
Letter, 1997 WL 998021 (July 21, 1997) (stating that pay for bona
fide meal periods need not be included in the regular rate).
---------------------------------------------------------------------------
Bona fide meal periods are not considered ``hours worked'' for
purposes of the FLSA's minimum wage or overtime requirements, and
employers are not required to pay for such time.\64\ The Department
proposes changing Sec. 778.320 to clarify that the payment of
compensation for bona fide meal periods alone does not convert such
time to hours worked unless agreement or actual course of conduct
establish that the parties have treated the time as hours worked. In
the Department's enforcement experience, the treatment of bona fide
meal breaks is frequently not subject to formal agreement and is often
established by informal policy or course of conduct. Payments for such
periods need only be included in the regular rate when it appears from
all the pertinent facts that the parties have treated compensated bona
fide meal periods as hours worked. This proposal clarifies the existing
requirements and does not substantively change either the calculation
of the regular rate or the determination of hours worked.
---------------------------------------------------------------------------
\64\ See 29 CFR 785.19.
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[[Page 11893]]
3. Reimbursable Expenses
The second clause of section 7(e)(2) excludes from the regular rate
``reasonable payments for traveling expenses, or other expenses,
incurred by an employee in the furtherance of his employer's interests
and properly reimbursable by the employer[.]'' \65\ The regulation in
Sec. 778.217 states that ``[w]here an employee incurs expenses on his
employer's behalf or where he is required to expend sums solely by
reason of action taken for the convenience of his employer, section
7(e)(2) is applicable to reimbursement for such expenses.'' \66\ The
Department promulgated this section in February 1950.\67\
---------------------------------------------------------------------------
\65\ 29 U.S.C. 207(e)(2).
\66\ 29 CFR 778.217(a).
\67\ See 15 FR 623.
---------------------------------------------------------------------------
While Sec. 778.217 limits reimbursable expenses to those
``solely'' in the interest of the employer, the statutory language does
not include this limitation. Instead, the FLSA simply excludes all
expenses incurred ``in the furtherance of [the] employer's
interests[,]'' \68\ and, as explained further below, neither the
Department nor the courts have since restricted excludable expenses to
only those that ``solely'' benefit the employer. The Department is
concerned that this single use of the word ``solely'' in Sec. 778.217
may be interpreted as more restrictive than what the FLSA actually
requires. The Department therefore proposes to remove the word
``solely'' from Sec. 778.217(a) to clarify its interpretation of the
reimbursable expenses clause of section 7(e)(2). This clarification is
consistent with the other subsections of Sec. 778.217, as well as
court rulings and the Department's opinion letters--which have not
required that excludable expenses solely benefit the employer.
---------------------------------------------------------------------------
\68\ 29 U.S.C. 207(e)(2).
---------------------------------------------------------------------------
Section 778.217(d) also discusses expenses that are excludable from
the regular rate. It emphasizes only whether such payments benefit the
employer or the employee; it does not require them to ``solely''
benefit one party or the other. Thus, payments for expenses that are
``incurred by the employee on the employer's behalf or for his benefit
or convenience'' merit exclusion from the regular rate, but
reimbursements for expenses ``incurred by the employee for his own
benefit,'' such as ``expenses in traveling to and from work, buying
lunch, paying rent, and the like,'' are not excluded from the regular
rate.\69\
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\69\ 29 CFR 778.217(d). This is consistent with the illustrative
examples in Sec. 778.217(b) of reimbursable expenses that may be
excluded from the regular rate, which include ``purchasing supplies,
tools, materials, or equipment on behalf of his employer,'' travel
expenses, including living expenses away from home, incurred while
traveling for work for the employer's benefit, and the cost of
``supper money'' to an employee in a situation where ``he or she
would ordinarily leave work in time to have supper at home, but
instead must remain to work additional hours for the employer's
benefit.'' See 29 CFR 778.217(b)(1), (b)(2), (b)(4).
---------------------------------------------------------------------------
Similarly, the Department's opinion letters do not analyze whether
an expense is incurred solely for the employer's convenience when
discussing whether it may be excluded from the regular rate. Instead,
the opinion letters analyze simply whether expenses benefit the
employer.\70\ Furthermore, since 1955, the Department's policy in WHD's
FOH has mirrored the statutory requirement that ``expenses incurred by
an employee in furtherance of his/her employer's interests'' may be
excluded from the regular rate, regardless of whether they ``solely''
benefit one party or the other.\71\
---------------------------------------------------------------------------
\70\ For example, the cost of food for eating meals during
travel out of town for work is for the employer's benefit;
therefore, such reimbursement may be excluded from the regular rate.
See Opinion Letter FLSA2004-3, 2004 WL 2146923 (May 13, 2004); see
also Opinion Letter FLSA-828 (July 19, 1976) (``[r]eimbursement to
an employee for expenses incurred on behalf of an employer'' would
not become part of the regular rate); Opinion Letter FLSA-940 (Mar.
9, 1977) (regular rate shall not include ``reimbursement for
expenses where an employee incurs out of pocket expenses on the
employer's behalf''); Opinion Letter FLSA-1234 (July 12, 1985)
(reimbursement must be for ``expenses incurred by the employee on
the employer's behalf or convenience'').
\71\ FOH 32d05a(a).
---------------------------------------------------------------------------
Consistent with the Department's practice and guidance, courts have
not analyzed whether the expenses at issue were incurred solely for the
employer's convenience when determining whether they are excludable
from the regular rate. Instead, courts have emphasized the statutory
requirement that the expenses need only benefit the employer.\72\
---------------------------------------------------------------------------
\72\ See, e.g., Berry v. Excel Grp., Inc., 288 F.3d 252, 253-54
(5th Cir. 2002) (concluding that reimbursements of travel expenses
were primarily for the employer's benefit; therefore, such expenses
were excluded from the regular rate); see also Brennan v. Padre
Drilling Co., Inc., 359 F. Supp. 462, 465 (S.D. Tex. 1973) (per diem
for traveling expenses is ``expended by the employee in the
furtherance of his employer's interest''); Sharp v. CGG Land, Inc.,
840 F.3d 1211, 1215 (10th Cir. 2016) (``the proper focus under
section 778.217(b)(3) is whether the $35 payments are for
reimbursement of travel expenses incurred in furtherance of the
employer's interests'').
---------------------------------------------------------------------------
The Department also proposes to clarify section 7(e)(2)'s
requirement that only ``reasonable'' and ``properly reimbursable''
expenses may be excluded from the regular rate when reimbursed. Current
Sec. 778.217(b)(3) permits employers to exclude from the regular rate
``[t]he actual or reasonably approximate amount expended by an employee
who is traveling `over the road' on his employer's business, for
transportation . . . and living expenses away from home, [or] other
[such] travel expenses[.]'' Section 778.217(c) cautions that ``only the
actual or reasonably approximate amount of the expense is excludable
from the regular rate. If the amount paid as `reimbursement' is
disproportionately large, the excess amount will be included in the
regular rate.''
The Department proposes additional explanation on what is
``reasonable''--and thus not ``disproportionately large''--by referring
to the Federal Travel Regulation. The Department believes that the
amounts set in the Federal Travel Regulation are not excessive and are
easily ascertained, given its ``two principal purposes'' of
``balanc[ing] the need to assure that official travel is conducted in a
responsible manner with the need to minimize administrative costs'' and
``communicat[ing] the resulting policies in a clear manner to Federal
agencies and employees.'' \73\ The Department thus proposes to add
regulatory text explaining that a payment for an employee traveling on
his or her employer's business is per se reasonable if it is at or
beneath the maximum amounts reimbursable or allowed for the same type
of expense under the Federal Travel Regulation and meets Sec.
778.217's other requirements. Those other requirements include that the
reimbursement be for the ``actual or reasonably approximate amount''
\74\ of the expense, that the expense be incurred on the employer's
behalf, and that the expense not vary with hours worked.\75\ The
proposed regulatory text also clarifies that a reimbursement for an
employee traveling on his or her employer's business exceeding the
Federal Travel Regulation limits is not necessarily unreasonable. This
is so because a payment may be more than that required ``to minimize
administrative costs'' yet still within the
[[Page 11894]]
realm of reasonable business and industry norms.
---------------------------------------------------------------------------
\73\ 41 CFR 300-1.2. Those amounts are published online annually
by the General Services Administration. See GSA, Plan and Book,
www.gsa.gov/travel/plan-and-book.
\74\ Gagnon v. United Technisource, Inc., 607 F.3d 1036, 1041-42
(5th Cir. 2010), provides a helpful contrast to a properly
excludable reimbursement. There, multiple facts indicated that the
employee's purported ``per diem'' was simply a scheme to avoid
paying overtime. Those facts included the per diem's rise over time
without any clear connection to travel or other expenses, its
variance by the hour, its cap at 40 hours per week, and its payment
in combination with a well-below-market wage.
\75\ See, e.g., Baouch v. Werner Enters., Inc., 908 F.3d 1107,
1116 (8th Cir. 2018) (``Per diem payments that vary with the amount
of work performed are part of the regular rate.'').
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4. Other Similar Payments
Section 7(e) requires ``all remuneration for employment'' be
included in the regular rate, subject to that section's eight listed
exclusions. Section 7(e)(2) consists of three clauses, each of which
address a distinct category of excludable compensation. As discussed
above, the first excludes ``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.'' The
second excludes ``reasonable payments for traveling expenses, or other
expenses, incurred by an employee in the furtherance of his employer's
interests and properly reimbursable by the employee.'' The third clause
excludes ``other similar payments to an employee which are not made as
compensation for his hours of employment.''
``[O]ther . . . payments'' are ``similar'' to those in the first
two clauses because they are ``not made as compensation for [an
employee's] hours of employment.'' The first two clauses share the
essential characteristic of having no connection to the quantity or
quality of work performed. The ``other similar payments'' clause thus
should exclude payments not tied to an employee's hours worked,
services rendered, job performance, credentials, or other criteria
linked to the quality or quantity of the employee's work.\76\
---------------------------------------------------------------------------
\76\ See Reich v. Interstate Brands Corp., 57 F.3d 574, 578 (7th
Cir. 1995) (The word ``similar'' in Section 7(e)(2) refers to other
payments that do not depend at all on when or how much work is
performed''); Minizza v. Stone Container Corp., 842 F.2d 1456, 1462
(3d Cir. 1988) (payments under Section 7(e)(2) all ``share the
essential characteristic . . . of not being compensation for hours
worked or services rendered'').
---------------------------------------------------------------------------
In a sense, every benefit or payment given an employee is
``remuneration for employment.'' \77\ Certainly benefits like paid
vacation or sick leave are seen as such by many employers and
employees. But the section 7(e)(2) exclusions make clear that whether
or not they are remuneration, they are ``not made as compensation for
[the employee's] hours of employment'' because they have no
relationship to the employee's hours worked or services rendered. This
interpretation gives meaning to the third clause. It allows employers
to provide benefits unconnected to the quality or quantity of work,
even if those benefits are remuneration of a sort.
---------------------------------------------------------------------------
\77\ Cf. Minizza, 842 F.2d at 1460 (``Employers have a finite
amount to spend for the labor component of their product or service.
This sum can be allocated solely as compensation on an hourly basis
(in which event the payment would be fully includable in the
`regular rate'), or it can assume any number of other forms . . .
(in which case the payments may or may not be includable), in any
ratio the parties care to set.'').
---------------------------------------------------------------------------
Interpreting the third clause as simply a restatement of the
``remuneration'' requirement would contravene basic principles of
statutory interpretation.\78\ Such an interpretation would equate the
unique phrases ``all remuneration for employment'' and ``compensation
for [the employee's] hours of employment,'' even though Congress used
different words and thus, presumably, meant different things. This is
especially so when considering that one phrase uses the word
``employment'' when the other uses the term ``hours of employment.''
Such an interpretation would also render the third clause redundant,
another disfavored result. And it would be difficult to reconcile with
the first clause of section 7(e)(2), in which the payments are clearly
remuneration yet excludable from the regular rate.
---------------------------------------------------------------------------
\78\ See Reich, 57 F.3d at 578 (``The word `similar' then refers
to other payments that do not depend at all on when or how much work
is performed.''); Minizza, 842 F.2d at 1462. (``[W]e interpret the
phrase `other similar payments' by reading each clause of section
207(e)(2) separately. The phrase `other similar payments . . . not
made as compensation for hours of employment' does not mean just
other payments for idle hours or reimbursements, the two types of
payments set forth in the two preceding clauses of the section, but
payments not tied to hours of compensation, of which payments for
idle hours and reimbursements are only two examples.'') But see
Flores v. City of San Gabriel, 824 F.3d 890, 899 (9th Cir. 2016)
(``the `key point' '' for exclusion under the third clause ``is
whether the payment is `compensation for work' '' (quoting Local 246
Utility Workers Union of Am. v. S. Cal. Edison Co., 83 F.3d 292, 295
(9th Cir. 1996)); Acton v. City of Columbia, Mo., 436 F.3d 969, 976
(8th Cir. 2006) (``Section 207(e)(2), properly understood, operates
not as a separate basis for exclusion, but instead clarified the
types of payments that do not constitute remuneration for employment
for purposes of section 207.'').
---------------------------------------------------------------------------
With that said, ``other similar payments'' cannot be simply wages
in another guise, as some lump-sum, formula-based cash payments are.
When a payment is a wage supplement, even if not tied directly to
employee performance or hours, it is still compensation for ``hours of
employment.''
Payments to employees are not excludable under the ``other similar
payments'' clause merely because the payments are not specifically tied
to an employee's hours of work.\79\ For example, payments such as
production bonuses,\80\ and the cost of furnished board, lodging, or
facilities,\81\ which ``though not directly attributable to any
particular hours of work are, nevertheless, clearly understood to be
compensation for services'' \82\ are not excludable under this
provision. Payments that differ only in form from regular wages by, for
instance, being paid in a monthly lump sum or as hardship premiums, are
better characterized as wages or bonuses than as ``other similar
payments'' excludable from the regular rate. The other similar payments
clause cannot be interpreted so broadly as to ``obliterat[e] the
qualifications and limitations'' placed on excludable payments
specifically addressed in section 7(e)'s various other sections, which
could render such limits ``superfluous.'' \83\
---------------------------------------------------------------------------
\79\ See Local 246 Utility Workers Union of Am. v. S. California
Edison Co., 83 F.3d 292, 295 n.2 (9th Cir. 1996) (``Even if payments
to employees are not measured by the number of hours spent at work,
that fact alone does not qualify them for exclusion under
7(e)(2).''); Featsent v. City of Youngstown, 70 F.3d 900, 904 (6th
Cir. 1995) (``7(e)(2) does not exclude every payment not measured by
hours of employment from the regular rate.''); Reich, 57 F.3d at 577
(``We cannot read 7(e)(2) in isolation. . . . It is one among many
exemptions, and a glance at a few of the others shows that 7(e)(2)
cannot possibly exclude every payment that is not measured by the
number of hours spent at work.'').
\80\ See 29 CFR 778.211(c).
\81\ See 29 CFR 778.116.
\82\ 29 CFR 778.224(a).
\83\ Reich, 57 F.3d at 578.
---------------------------------------------------------------------------
The interpretation the Department states here has considerable
support in the case law. The Third Circuit held in Minizza v. Stone
Container Corp. that two lump sums paid to select employees to induce
them to agree to a collective-bargaining agreement were excludable as
an ``other similar payment'' because they were not compensation for
hours worked or services rendered.\84\ The court interpreted the clause
to exclude ``payments not tied to hours of compensation, of which
payments for idle hours and reimbursements are only two examples.''
\85\ The court's decision that these payments were not compensation for
employment rested in part on the fact that the ``eligibility
requirements were not meant to serve as compensation for service, but
rather to reduce the employer's costs,'' but also in part on the fact
that ``the eligibility terms themselves [for the lump sums] [did] not
require specific service''--it did ``not matter how many hours an
employee worked during that period, nor how many hours he might work in
the future.'' \86\
---------------------------------------------------------------------------
\84\ Minizza, 842 F.2d 1456, 1462.
\85\ Id. at 1461.
\86\ Id. at 1460-61; see also id. at 1462 (``If the payments
were made as compensation for hours worked or services provided, the
payments would have been conditioned on a certain number of hours
worked or on an amount of services provided.'').
---------------------------------------------------------------------------
The Seventh Circuit espoused a similar understanding in Reich v.
Interstate Brands Corp.\87\ The court held
[[Page 11895]]
that regular, planned $12 payments to bakers who worked weeks without
two consecutive days off could not be excluded from the regular rate
under section 7(e)(2). The court reasoned that the payments were
materially no different from a higher base rate to compensate the
bakers for taking on an unpleasant schedule.\88\ ``Other similar
payments'' are different, wrote the court. ``The word `similar' . . .
refers to other payments that do not depend at all on when or how much
work is performed.'' \89\ Similarly, the Sixth Circuit has held that
pay differentials based on employees' education level, shift
differentials, and hazardous pay, are compensation for services
rendered, unlike payments that ``are unrelated to [employees']
compensation for services and hours of service.'' \90\ Some circuit
courts have interpreted the ``other similar payments'' to not exclude
payments that are ``compensation for work.'' \91\ When these courts use
these or similar phrases to capture the idea that the regular rate
includes payments tied to work performance or that function as a wage
supplement, they are correct. But insofar as they equate ``compensation
for work'' with ``remuneration for employment,'' \92\ that is difficult
to reconcile with the text of the FLSA. As explained above, the FLSA
uses two different phrases, ``remuneration for employment'' and
``compensation for hours of employment,'' each of which should be given
unique content. And just as importantly, the first clause of section
7(e)(2) excludes vacation and sick leave, which is clearly
remunerative; ``other similar payments'' to them can be remunerative
too.
---------------------------------------------------------------------------
\87\ 57 F.3d 574.
\88\ See id. at 578-79.
\89\ Id. at 578.
\90\ Featsent, 70 F.3d at 904-06.
\91\ See e.g., Flores, 824 F.3d at 899.
\92\ See Acton, 436 F.3d at 976 (``the language `not made as
compensation for [the employee's] hours of employment' posited in
Sec. 207(e)(2) is but a mere re-articulation of the `remuneration
for employment' requirement set forth in the preambulary language of
Sec. 207(e)'').
---------------------------------------------------------------------------
The Department believes that its interpretation espoused here, and
applied in some of the clarifications to the regulations proposed
below, also promotes a clear yet flexible standard for employers and
employees to order their affairs. Employers can understand the
standard: Payments are ``other similar payments'' when they do not
function as formulaic wage supplements and are not tied to hours
worked, services rendered, job performance, credentials, longevity, or
other criteria linked to the quality or quantity of the employee's
work, but are conditioned merely on one being an employee. (Basic
commonsense conditions, such as a reasonable waiting period for
eligibility \93\ or the requirement to repay benefits as a remedy for
employee misconduct, are permitted.) The standard also clarifies that
there is space for a variety of creative benefits offerings, and
encourages their provision to wide groups of employees instead of
reserving them only for FLSA-exempt employees.
---------------------------------------------------------------------------
\93\ See Minizza, 842 F.2d at 1460 (``A review of the
eligibility terms reflects a requirement only that a payee achieve
the status of an active employee for a specified period of time
prior to receipt. It does not matter how many hours an employee
worked during that period, nor how many hours he might work in the
future.'').
---------------------------------------------------------------------------
Section 778.224 of the regulations addresses miscellaneous items
that are excludable from an employee's regular rate under the ``other
similar payments'' clause of section 7(e)(2) because they are ``not
made as compensation for . . . hours of employment[.]'' \94\ Section
778.224(b) currently provides the following brief, nonexhaustive set of
examples of ``other similar payments'' excludable from an employee's
regular rate: ``(1) Sums paid to an employee for the rental of his
truck or car; (2) Loans or advances made by the employer to the
employee; [and] (3) The cost to the employer of conveniences furnished
to the employee such as parking space, restrooms, lockers, on-the-job
medical care and recreational facilities.'' \95\ The Department added
this set of examples to the part 778 regulations in 1950,\96\ and has
not substantively amended them since. The regulation makes clear that
``it was not considered feasible'' to provide an exhaustive list of
excludable ``other similar payments'' given the ``variety of
miscellaneous payments [that] are paid by an employer to an employee
under peculiar circumstances.'' \97\
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\94\ 29 U.S.C. 207(e)(2).
\95\ 29 CFR 778.224(b).
\96\ See 15 FR 632 (1950), codified at 29 CFR 778.7(g).
\97\ 29 CFR 778.224(a).
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The Department continues to believe that providing a comprehensive
list of all ``other similar payments'' excludable under section
7(e)(2)'s third clause is infeasible. The Department recognizes,
however, that an updated list of examples would further help employers
understand their legal obligations by addressing some of the innovative
changes in compensation practices and workplace environments that have
occurred over the last 69 years. Accordingly, the Department proposes
clarifying in Sec. 778.224(b) that the following items may be excluded
from an employee's regular rate under the ``other similar payments''
clause of section 7(e)(2). Adding these clarifying examples may
encourage employers to provide more of these types of benefits to their
employees.
a. Specialist Treatment Provided Onsite
The Department proposes clarifying in Sec. 778.224(b)(3) that
employers may exclude from the regular rate the cost of providing
onsite treatment from specialists such as chiropractors, massage
therapists, personal trainers, counselors, Employment Assistance
Programs, or physical therapists. Such specialist treatment resembles
``on-the-job medical care,'' which Sec. 778.224(b)(3) already
identifies as an excludable ``convenience furnished to the employee.''
\98\ Employers that provide onsite specialist treatment do so for a
variety of reasons, including to raise workplace morale and promote
employee health. Such treatment does not constitute compensation for
hours of employment under section 7(e)(2).\99\
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\98\ 29 CFR 778.224(b)(3).
\99\ This proposal is not intended to affect the circumstances
under which receiving medical attention is considered to be hours
worked. See 29 CFR 785.43.
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b. Gym Access, Gym Memberships, and Fitness Classes
The Department proposes clarifying in Sec. 778.224(b)(3) that the
cost of providing employees with gym access, gym memberships, and
fitness classes, whether onsite or offsite, is excludable from the
regular rate. These fitness benefits resemble ``recreational
facilities,'' which Sec. 778.224(b)(3) already identifies as an
excludable convenience provided to employees. According to one survey,
a substantial number of employers provided fitness benefits.\100\
Employers may provide such conveniences for many reasons, including to
raise workplace morale and promote employee health. The Department
proposes to clarify that providing gym benefits and fitness classes is
not included in the regular rate as compensation for hours of
employment.\101\
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\100\ See Soc'y for Human Res. Mgmt., ``2018 Employee Benefits:
The Evolution of Benefits,'' at 23 (June 2018), https://www.shrm.org/hr-today/trends-and-forecasting/research-and-surveys/Documents/2018%20Employee%20Benefits%20Report.pdf.
\101\ In circumstances where maintaining a certain level of
physical fitness is a requirement of the employee's job, the cost to
the employer of providing exercise opportunities is a facility
``furnished primarily for the benefit or convenience of the
employer,'' as described in Sec. 531.3(d). Facilities furnished for
the employer's benefit do not qualify as wages or remuneration for
employment and thus need not be included in the regular rate.
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[[Page 11896]]
c. Wellness Programs
The Department proposes adding an example in Sec. 778.224(b)(4) to
clarify that employers may exclude the cost of providing certain health
promotion and disease prevention activities, often known as wellness
programs. Examples of some common wellness programs include health risk
assessments, biometric screenings, vaccination clinics (including
annual flu vaccinations), nutrition classes, weight loss programs,
smoking cessation programs, stress reduction programs, exercise
programs, and coaching to help employees meet health goals.\102\
Wellness programs are often provided to employees enrolled in an
employer-sponsored health insurance plan, but some employers offer
wellness programs to employees regardless of their health insurance
coverage.
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\102\ See, e.g., Soc'y for Human Res. Mgmt., ``How to Establish
and Design a Wellness Program,'' https://www.shrm.org/resourcesandtools/hr-topics/pages/howtoestablishanddesignawellnessprogram.asp (last accessed Jan. 2,
2019).
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Workplace wellness programs are similar to ``on-the-job medical
care'' and ``recreational facilities,'' conveniences that the
regulations already specify are excludable from an employee's regular
rate.\103\ Employers may provide such programs to, for example, reduce
health care costs, reduce health-related absenteeism, and improve
employee health and morale. Such programs are not intended to
constitute compensation for hours of employment.
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\103\ 29 CFR 778.224(b)(3).
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d. Employee Discounts on Retail Goods or Services
The Department proposes adding an example in Sec. 778.224(b)(5) to
confirm that discounts on retail goods and services may be excluded
from the regular rate of pay as long as they are not tied to an
employee's hours worked or services rendered. According to one survey,
many employers provide employees with an option to purchase these types
of goods or services at a discounted price relative to their full
retail value.\104\ Such discounts are commonly available to employees
regardless of their quality or quantity of work, and it is solely the
employees' choice whether to purchase anything under the discount. When
these discounts are available to employees regardless of their hours
worked or services rendered, and are not tied to any duties performed,
they qualify as ``other similar payments'' under section 7(e)(2).\105\
Alternatively, employee discounts could constitute ``payments in the
nature of gifts'' under section 7(e)(1), where they are not based on
the number of hours worked and are not in the nature of
compensation.\106\
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\104\ See Soc'y for Human Res. Mgmt., ``2018 Employee Benefits:
The Evolution of Benefits,'' at 31 (June 2018), https://www.shrm.org/hr-today/trends-and-forecasting/research-and-surveys/Documents/2018%20Employee%20Benefits%20Report.pdf (from 2014 to
2018, employers offering an employee discount on company services
ranged from 31% to 34%, and employers offering employer-sponsored
personal shopping (e.g., retail) discounts ranged from 11% to 19%).
\105\ See Reich, 57 F.3d at 578 (payments under Section 7(e)(2)
are those ``that do not depend at all on when or how much work is
performed''); Minizza, 842 F.2d at 1462 (payments under Section
7(e)(2) all ``share the essential characteristic . . . of not being
compensation for hours worked or services rendered'').
\106\ See, e.g., Lemus v. Denny's Inc., No. 10cv2061-CAB, 2015
WL 13740136, at *11 (S.D. Cal. July 31, 2015); Rau v. Darling's Drug
Store, Inc., 388 F. Supp. 877, 879 (W.D. Pa. 1975).
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More than 50 years ago, the Department stated that such employee
discounts are not included in the regular rate of pay. In a 1962
opinion letter, the Department found that the value of ``concessions
granted to employees . . . on charges for telephone service'' was ``not
part of wages includible in the regular rate of pay''--in part because
``[s]uch concessions appear to be similar to discounts on merchandise
offered by many retail establishments to their employees which [the
Department] do[es] not regard as wages.'' \107\ Discounts like these
are not fungible cash but merely a lower price on the employer's
offerings. They appeal only to the employees who want to use them and
are limited to the offered selection of goods or services. Employees
must expend their own funds to avail themselves of the discounts. The
discounts are presumably limited in their value, since employers likely
do not offer discounts that allow their employees to arbitrage large
quantities of goods or otherwise materially harm the business of their
employer. And employers may also place conditions on the discounts to
protect their interests by, for instance, requiring that discounted
restaurant meals be eaten on the premises to prevent abuse.\108\ These
discounts are not intended to be compensation for hours of employment.
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\107\ Opinion Letter, 1962 DOLWH LEXIS 217 (Oct. 31, 1962).
\108\ See Rodriguez v. Taco Bell Corp., 896 F.3d 952, 954
(2018).
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This proposal, therefore, would confirm the excludability of
employee discounts on retail goods and services from the regular rate
of pay, provided they are not tied to an employee's hours worked.
Section 7(e)(2) provides that only payments ``not made as compensation
for [the employee's] hours of employment'' are excludable from the
regular rate of pay.\109\
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\109\ 29 U.S.C. 207(e)(2); see also 29 CFR 778.224(a).
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e. Tuition and Other Benefits
The Department is proposing to add an example in Sec.
778.224(b)(5) clarifying that certain tuition programs offered by
employers may be excludable from the regular rate. Some employers today
offer discounts for online courses, continuing-education programs,
modest tuition-reimbursement programs, programs for repaying
educational debt, and the like. Such tuition programs have been the
subject of litigation,\110\ and the Department believes more clarity in
this area would be desirable. As long as tuition programs are available
to employees regardless of their hours worked or services rendered, and
are instead contingent merely on one's being an employee, the
Department believes they would qualify as ``other similar payments''
under section 7(e)(2).\111\ The Department also believes that at least
some tuition programs offered by employers may be excludable from the
regular rate under section 7(e)(1) as ``sums paid as gifts.'' Finally,
the Department is considering whether certain tuition programs may also
be excludable under section 7(e)(4) if provided pursuant to a bona fide
plan, and, as stated more fully below, seeks comment specifically on
the nature of tuition benefits provided by employers.
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\110\ See White v. Publix Super Mkts., Inc., No. 3:14-cv-1189,
2015 WL 4949837 (M.D. Tenn. Aug. 19, 2015); Adoma v. Univ. of
Phoenix, Inc., 779 F. Supp. 2d 1126 (E.D. Cal. 2011).
\111\ See Reich, 57 F.3d at 578 (payments under Section 7(e)(2)
are those ``that do not depend at all on when or how much work is
performed''); Minizza, 842 F.2d at 1462 (payments under Section
7(e)(2) all ``share the essential characteristic . . . of not being
compensation for hours worked or services rendered'').
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The Department believes that tuition programs, in the main,
function as the kinds of payments excludable under section 7(e)(2).
Unlike wage supplements, these tuition programs are not fungible, any-
purpose cash, but must be directed toward particular educational and
training opportunities. These programs are also optional, appeal only
to those employees who want to use them, and are directed toward
educational and training pursuits outside the employer's workplace.
Such tuition programs do not meet the basic necessities of life, such
as food, clothing, or shelter. While the educational benefit may result
in employees better able to accomplish the employer's objectives, these
programs are not directly connected to the
[[Page 11897]]
employees' day-to-day duties for the employer.
Tuition programs could also potentially be ``sums paid as gifts,''
depending on their nature. Section 7(e)(1) excludes ``sums paid as
gifts; payments in the nature of gifts made at Christmas time or on
other special occasions, as a reward for service, the amounts of which
are not measured by or dependent on hours worked, production, or
efficiency.'' Because the first clause, ``sums paid as gifts,'' is
separated from the second clause by a semi-colon, the first clause must
address a separate set of excludable benefits from that in the second
clause. There may be some overlap between ``sums paid as gifts'' and
``payments in the nature of gifts made at Christmas time, on special
occasions, or as a reward for services,'' but the categories are not
coextensive.
Specifically, sums under the first clause are those ``paid as
gifts''--that is, paid with the express understanding that they are a
gift--as opposed to sums under the second clause, which are not
expressly given as a gift but are nevertheless ``in the nature of
gifts'' because of their timing. The second clause in 7(e)(1) therefore
expands the universe of excludable gifts from sums that are obviously
``paid as gifts'' to include those that are also ``in the nature of
gifts,'' but limits the latter category to those made at Christmas
time, on special occasions, or as rewards for service. In either case,
however, the payments must not be measured by or dependent on hours
worked, production, or efficiency.\112\
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\112\ 29 CFR 778.212.
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Whether the Department ultimately excludes tuition programs from
the regular rate in the final rule, and whether it does so under
section 7(e)(1), (2), (4), or all or some of them, this proposed
clarification excluding tuition programs from the regular rate would
not affect the Department's regulations at Sec. 531.32 referencing
``meals, dormitory rooms, and tuition furnished by a college to its
student employees'' as an ``other facility.'' \113\ The college
environment is a unique context in which learning, work, and daily
living are inextricably connected, tightly knit, and often all provided
by the same entity, that being the college.
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\113\ 29 CFR 531.32(a).
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The Department seeks comment on the following tuition-related
questions: Are there other aspects of the FLSA, the Department's
regulations, or parties' interactions with the Department that affect
employers' and employees' conduct and that warrant consideration when
it comes to making clear that tuition programs may be excluded from the
regular rate? Do employers and employees feel that express regulatory
clarification on excluding tuition programs from the regular rate would
be helpful? Are employers hesitant to offer employees a tuition program
because of concerns about legal compliance, litigation, or other issues
related to the regular rate? What sorts of tuition programs are
employers offering, and why are employers doing so? How do these
tuition programs work? Are employers using bona fide third-party plans
for tuition programs? What terms and conditions are employers setting
on tuition programs? How are employers and employees benefiting from
these tuition programs?
The Department acknowledges that the above examples proposed for
express exclusion from the regular rate are just a few of many types of
compensation that are not compensation for work and therefore
excludable under section 7(e)(2). The Department welcomes suggestions
for any additional examples that the Department should add to Sec.
778.224 to illustrate other similar payments that are not compensation
for work. The Department also welcomes suggestions about whether any of
the above examples are excludable under other provisions of section
7(e). Finally, the Department welcomes suggestions about whether other
sections in Part 778 should be updated to clarify that any of the
above-referenced compensation is excludable from the regular rate under
these or any other principles under section 7(e).
5. Show-Up Pay, Call-Back Pay, and Payments Similar to Call-Back Pay
Section 778.220 excludes from the regular rate ``show-up'' or
``reporting'' pay, which is defined as compensation for a specified
minimum number of hours at the applicable straight-time or overtime
rate on ``infrequent or sporadic'' occasions in which an employee is
not provided with the expected amount of work after reporting as
scheduled.\114\ Payments for hours actually worked are included in the
regular rate; amounts beyond what the employee would receive for the
hours worked are excludable.
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\114\ See 29 CFR 778.220.
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Section 778.221 addresses ``call-back'' pay. Call-back pay is
additional compensation for calling an employee back to work without
prearrangement to perform extra work after the employee's scheduled
hours have ended. It is typically paid for a specified number of hours
at the applicable straight-time or overtime rate.\115\ Call-back pay is
treated the same as show-up pay under Sec. 778.220.
---------------------------------------------------------------------------
\115\ See 29 CFR 778.221(a).
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Section 778.222 addresses ``other payments similar to `call-back'
pay,'' which are ``extra payments made to employees on infrequent and
sporadic occasions, for failure to give an employee sufficient notice
to report for work on regular days of rest or outside of regular
hours,'' and ``extra payments made on infrequent and sporadic occasions
solely because an employee is called back to work before the expiration
of a specified number of hours between shifts or tours, sometimes
referred to as a `rest period.' '' \116\ Such time is treated the same
as show-up pay under Sec. 778.220 and call-back pay under Sec.
778.221. Sections 778.220, 778.221, and 778.222 require that the
payments be ``infrequent and sporadic'' to be excludable from the
regular rate.
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\116\ 29 CFR 778.222.
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As referenced above, show-up or reporting pay is paid when the
employee is scheduled to work but the employer fails to provide the
expected amount of work.\117\ As such, this type of payment is
excludable under the first clause of section 7(e)(2), which excludes
payments made for ``occasional periods'' when no work is performed due
to the ``failure of the employer to provide sufficient work.'' \118\
Section 778.220 accordingly limits exclusion of such payments to when
they are made ``on infrequent and sporadic occasions.'' \119\
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\117\ Since 1940, the Department's position has been that show-
up pay that exceeded pay due for hours worked was meant to
compensate the employee for the consumption of his time and
discourage employers from calling in employees for only a fraction
of a day. Interpretive Bulletin No. 4 ] 70(8).
\118\ 29 U.S.C. 207(e).
\119\ 29 CFR 778.220.
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Call-back pay and similar payments, in contrast, are not made for
periods when the employer fails to provide sufficient work but are
instead additional payments made to compensate the employee when the
employer provides unanticipated work.\120\ As such, these payments do
not fall under the first clause of section 7(e)(2). The Department has
stated that call-back pay described in Sec. 778.221 and the other
payments described in Sec. 778.222 instead fall under the ``other
similar payments'' clause of section 7(e)(2)--which Congress did not
restrict to ``occasional periods'' (unlike the first
[[Page 11898]]
clause of section 7(e)(2)).\121\ The FLSA does not require that
payments under Sec. Sec. 778.221 and 778.222 be only ``occasional'' to
be excluded from the regular rate. Accordingly, the Department proposes
removing the regulatory restriction that requires the payments
discussed in Sec. Sec. 778.221 and 778.222 to be ``infrequent and
sporadic.'' \122\
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\120\ 29 CFR 778.221-.222.
\121\ See Opinion Letter FLSA-574 (Nov. 18, 1964) (``turn
around'' payments excludable under third clause); Opinion Letter
FLSA-933 (July 20, 1964) (payment for failure to provide rest period
excludable under third clause); Opinion Letter (Jan. 1, 1964)
(stating that extra payments ``made for recall to work outside of
regular working hours and for shortened `rest periods' between
shifts . . . may be excludable from the regular rate under the third
clause'' of section 7(e)(2)).
\122\ The Department is also proposing to update the reference
to Sec. 778.222 that appears in Sec. 778.203(d).
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Although the Department proposes removing the words ``infrequent
and sporadic'' from Sec. Sec. 778.221 and 778.222, the Department
still believes that payments excluded under these provisions should be
``without prearrangement.'' \123\ For example, if an employer retailer
called in an employee to help clean up the store for 3 hours after an
unexpected roof leak, and then again 3 weeks later for 2 hours to cover
for a coworker who left work for a family emergency, payments for those
instances would be without prearrangement and any call-back pay that
exceeded the amount the employee would receive for the hours worked
would be excludable. However, when payments under Sec. Sec. 778.221
and 778.222 are so regular that they, in effect, are prearranged, they
are compensation for work. For example, if an employer restaurant
called in an employee server for two hours of supposedly emergency help
during the busiest part of Saturday evening for 6 weeks out of 2 months
in a row, that would be essentially prearranged and all of the call-
back pay would be included in the regular rate. The Department
therefore proposes to clarify that such payments under Sec. Sec.
778.221 (``call-back'' pay) and 778.222 (other payments similar to
``call-back'' pay) may be compensation for employment and therefore
included in the regular rate. The Department further proposes to
clarify that the regulations apply regardless of whether the
compensation is pursuant to established practice, an employment
agreement, or state or local law.
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\123\ 29 CFR 778.221; see also Stewart v. San Luis Ambulance
Inc., No. CV 13-09458-BRO (SSX), 2015 WL 13684710, at *7 (C.D. Cal.
Oct. 6, 2015) (call-back payments must be ``without
prearrangement'').
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The Department notes that certain states and localities regulate
scheduling practices and impose a monetary penalty on employers (which
is paid to employees) in situations analogous to those discussed in
Sec. Sec. 778.220, 778.221, and 778.222.\124\ These state and local
laws include certain penalties that potentially affect regular rate
calculations. This includes, for example: (1) ``Reporting pay'' for
employees who are unable to work their scheduled hours because the
employer subtracted hours from a regular shift before or after the
employee reports for duty; \125\ (2) ``clopening'' or ``right to rest''
pay for employees who work the end of one day's shift and the start of
the next day's shift with fewer than 10 or 11 hours between the shifts,
or who work during a rest period; \126\ (3) ``predictability pay'' for
employees who do not receive the requisite notice of a schedule change;
\127\ and (4) ``on-call pay'' for employees with a scheduled on-call
shift but who are not called in to work.\128\ In light of these recent
trends in state and local scheduling laws, the Department proposes to
clarify the treatment of these penalty payments under the regulations.
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\124\ A number of state and local jurisdictions have introduced
laws regulating scheduling practices in recent legislative sessions.
See, e.g., H.B. 2467, 53rd Leg., 2d Reg. Sess. (Ariz. 2018); S.B.
321, 2018 Reg. Sess. (Conn. 2018); H.B. 5046, 100th Gen. Assemb.
(Ill. 2018); S.B. 1000, 190th Leg. (Mass. 2017-18); H.B. 1614, S.B.
1116, 2017 Reg. Sess. (Md. 2017); S109, 218th Leg. (N.J. 2018); H.B.
741, 2015 Sess. (N.C. 2015); H.B. 7515, 7634, Jan. Sess. A.D. 2016
(R.I. 2016); Chi., Ill., Mun. Ordinance O2017-4947 (introduced June
28, 2017); Employee Scheduling (Call-in Pay), N.Y. St. Reg. LAB. 47-
17-00011-P (proposed Nov. 11, 2017); S.B. 828, 73rd Leg. Assemb.,
2017 Reg. Sess. (Or. 2017).
\125\ See, e.g., Seattle, Wash., Mun. Code 14.22.050 (2017).
\126\ See, e.g., N.Y.C., Admin. Code 20-1231 (2017); Seattle,
Wash., Mun. Code 14.22.035 (2017); Emeryville, Cal. Mun. Code 5-
39.06 (2017).
\127\ See, e.g., S.F., Cal., Police Code art. 33G (2015);
Emeryville, Cal., Mun. Code 5-39.01 (2017); N.Y.C., N.Y., Admin.
Code 20-1201 (2017); Seattle, Wash., Mun. Code 14.22.050 (2017).
\128\ See, e.g., S.F., Cal., Police Code art. 3300G.4(d) (2015);
Seattle, Wash., Mun. Code 14.22.050. (2017).
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Reporting pay pursuant to state or local scheduling laws would be
treated like show-up pay under Sec. 778.220 because it is payment for
an employer's failure to provide expected work.\129\ Compensation for
any hours actually worked are included in the regular rate;
compensation beyond that may be excluded from the regular rate as
payment to compensate the employee for time spent reporting to work and
to prevent loss of pay from the employer's failure to provide expected
work during regular hours.
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\129\ See, e.g., Seattle, Wash., Mun. Code 14.22.050 (2017).
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``Clopening'' or ``right to rest'' pay under state or local
scheduling laws would be analyzed under Sec. 778.222 and would
therefore generally be excludable from the regular rate as long as the
payments are not regular. The Department would also analyze
``predictability pay'' penalties under Sec. 778.222, as they are
analogous to payments for failure to give an employee sufficient notice
to report for work outside of his or her regular work schedule. As with
reporting and call-back pay, compensation ``over and above the
employee's earnings for the hours actually worked at his applicable
rate (straight-time or overtime, as the case may be), is considered as
a payment that is not made for hours worked,'' and is therefore
excludable from the regular rate.\130\
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\130\ 29 CFR 778.222.
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Finally, the Department proposes to analyze ``on-call pay''
scheduling penalties under Sec. 778.223, which is entitled ``[p]ay for
non-productive hours distinguished.'' \131\ Under this regulation, the
Department may require payment for ``on-call'' time to be included in
the regular rate when such payments are ``compensation for performing a
duty involved in the employee's job.'' \132\
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\131\ Id. 778.223.
\132\ Id.
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B. Discretionary Bonuses Under Section 7(e)(3)
Section 7(e)(3) of the FLSA excludes from the regular rate ``sums
paid in recognition of services performed'' if ``both the fact that
payment is to be made and the amount of the payment are determined at
the sole discretion of the employer at or near the end of the period
and not pursuant to any prior contract, agreement, or promise causing
the employee to expect such payments regularly.'' \133\ Section 778.211
of the regulations implements this exclusion and provides additional
details concerning the types of bonuses that qualify for this
exclusion. The Department proposes to elaborate on the types of bonuses
that are and those that are not discretionary in Sec. 778.211 to add
clarity for employers and employees.
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\133\ 29 U.S.C. 207(e)(3).
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The Department proposes modifying language in Sec. 778.211(c) and
adding a new paragraph (d) to clarify that, under longstanding
principles, neither the label assigned to a bonus nor the reason it was
paid conclusively determine whether it is discretionary under section
7(e)(3).\134\ While attendance,
[[Page 11899]]
production, work quality, and longevity bonuses, as those terms are
commonly used, are usually paid pursuant to a prior contract,
agreement, or promise causing the employee to expect such payments
regularly, and therefore are non-discretionary bonuses that must be
included in the regular rate, there may be instances when a bonus that
is labelled as one of these types of bonuses is not in fact promised in
advance and instead the employer retains discretion as to the fact and
amount of the bonus until at or near the end of the period to which the
bonus corresponds. The Department proposes modifying the language in
Sec. 778.211(c) and adding a new paragraph (d) to make clear that the
label assigned to a bonus is not determinative. Instead, the terms of
the statute and the facts specific to the bonus at issue determine
whether a bonus is an excludable discretionary bonus. Under section
7(e)(3), a bonus is discretionary and therefore excludable, regardless
of what it is labelled or called, if both the fact that the bonus is to
be paid and the amount are determined at the sole discretion of the
employer at or near the end of the period to which the bonus
corresponds and the bonus is not paid pursuant to any prior contract,
agreement, or promise causing the employee to expect such payments
regularly.
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\134\ See 29 U.S.C. 207(e)(3); Minizza v. Stone Container Corp.,
842 F.2d 1456, 1462 n.9 (3d Cir. 1988) (observing that ``what the
payments are termed is not important''); Walling v. Harnischfeger
Corp., 325 U.S. 427, 430 (1945) (``To discover [the regular] rate .
. . we look not to contract nomenclature but to the actual
payments.''); Donohue v. Francis Servs., Inc., No. Civ.A.04-170,
2005 WL 1155860, at *1 (E.D. La. 2005) (denying an employer's
summary judgment motion over ``amounts described as `discretionary
bonuses' ''). This principle comports with longstanding
interpretation of other FLSA provisions; see, e.g., 29 CFR 541.2
(cautioning that ``[a] job title alone is insufficient to establish
the exempt status of an employee'' under Section 13(a)(1) of the
Act).
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Additionally, the Department proposes to include in new section
Sec. 778.211(d) examples of bonuses that may be discretionary to
supplement the examples of bonuses that commonly are non-discretionary
discussed in Sec. 778.211(c). Such bonuses may include, for example,
employee-of-the-month bonuses, bonuses to employees who made unique or
extraordinary efforts which are not awarded according to pre-
established criteria, severance bonuses, bonuses for overcoming
stressful or difficult challenges, and other similar bonuses for which
the fact and amount of payment is in the sole discretion of the
employer until at or near the end of the periods to which the bonuses
correspond and that are not paid ``pursuant to any prior contract,
agreement, or promise causing the employee to expect such payments
regularly.'' \135\ The Department recognizes that employers offer many
differing types of bonuses to their employees, and that compensation
practices will continue to evolve going forward. The Department
therefore welcomes comment from the public about other common types of
bonuses that the Department should address in Sec. 778.211.
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\135\ See 29 U.S.C. 207(e)(2); see also Alonzo v. Maximus, Inc.,
832 F. Supp. 2d 1122, 1133 (C.D. Cal. 2011) (holding that bonuses to
employees who ``made unique or extraordinary efforts and were not
awarded according to pre-established criteria or pre-established
rates'' were excludable) (internal quotation marks omitted); Opinion
Letter FLSA2008-12, 2008 WL 5483051 (Dec. 1, 2008) (bonuses paid
without prior promise or agreement to 911 dispatchers in recognition
of high stress level of their job are excludable discretionary
bonuses). See 29 U.S.C. 207(e)(2).
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C. Excludable Benefits Under Section 7(e)(4)
FLSA section 7(e)(4) excludes from the regular rate ``contributions
irrevocably made by an employer to a trustee or third person pursuant
to a bona fide plan for providing old-age, retirement, life, accident,
or health insurance or similar benefits for employees.'' \136\ Section
778.215(a)(2) explains that, among other things, that ``[th]e primary
purpose of the plan must be to provide systematically for the payment
of benefits to employees on account of death, disability, advanced age,
retirement, illness, medical expenses, hospitalization, and the like.''
The Department proposes adding more examples of the types of modern
benefit plans that may be excludable from the regular rate of pay.
Specifically, the Department proposes to add examples for benefits on
account of ``accident, unemployment, and legal services'' to Sec.
778.215(a)(2). The addition of ``accident'' derives directly from
section 7(e)(4), which expressly uses the term (even though the current
regulations do not). The addition of benefits for unemployment and
legal services reflects the Department's conclusion that, although
employers may not have commonly offered these benefits when Congress
enacted the FLSA in 1938,\137\ they are ``similar benefits'' to those
expressly listed in section 7(e)(4).
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\136\ 29 U.S.C. 207(e)(4).
\137\ See Bureau of Labor Statistics, An Overview of Employee
Benefits 20 (2005), https://www.bls.gov/careeroutlook/2005/summer/art02.pdf.
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First, like other specifically enumerated types of benefit plans
under section 7(e)(4), these benefit plans typically provide monetary
benefits that are ``specified or definitely determinable on an
actuarial basis.'' \138\ Second, benefit plans for unemployment or
legal services protect employees from events that are rare but
statistically predictable and that could otherwise cause significant
financial hardship, just as is the case with life insurance, accident
insurance, and the catastrophic-protection provisions of life
insurance. Third, benefit plans for unemployment or legal services
offer financial help when an employee's earnings are (unemployment) or
may be (legal services) materially affected, as is the case with the
other benefit plans. Employees who retire, reach an older age, or
suffer an accident or health issue may be unable to work, or have their
ability to work affected.
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\138\ Sec. 778.215(a)(3)(i).
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The Department notes that other characteristics of the various
types of plans excludable under section 7(e)(4) may differ, but they
still remain ``similar'' for purposes of the statute. Under the plain
text of the statute, excludable plans need not be related to physical
health. Retirement benefits are excludable, for instance, even though
an employee may choose to retire for reasons wholly unrelated to
health. And excludable plans also need not be limited to benefits for
rare or even uncommon events. Health insurance, for instance, often
pays for everyday medical expenses, and retirement is an event
typically planned years in advance. Moreover, the benefits listed in
the statute may be subject to various forms of payment. Retirement
benefits are often a recurring payment, while accident and health
benefits can fluctuate, and a life insurance death benefit can be paid
in a lump sum. Therefore, insofar as the proposed additional examples
differ among themselves or among other expressly listed benefits by not
all being related to physical health, or not all being for rare events,
or not all being paid out the same way, those differences do not make
the proposed examples not ``similar'' under the statute. Indeed, such
differences are encompassed in the statutory examples themselves.
Of course, these proposed examples, like the examples already
provided in regulation and statute, would have to satisfy the other
various requirements outlined in Sec. 778.215.\139\ These additions
would simply help clarify that such plans are not categorically barred
from qualifying for exclusion under section 7(e)(4). The Department
welcomes comments and data on the prevalence and nature of these types
of
[[Page 11900]]
programs and on whether there are other similar benefit plans that
should be expressly included as examples.
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\139\ Section 778.215(a) contains five conditions all of which
must be met in order for employer contributions to be excluded from
the regular rate under 7(e)(4). 29 CFR 778.215(a)(1)-(5).
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D. Overtime Premiums Under Sections 7(e)(5)-(7)
FLSA sections 7(e)(5), (6), and (7) permit employers to exclude
from the regular rate certain overtime premium payments made for hours
of work on special days or in excess or outside of specified daily or
weekly standard work periods.\140\ More specifically, section 7(e)(5)
permits exclusion of premiums for ``hours worked in excess of eight in
a day or in excess of the maximum workweek applicable to such employee
[under section 7(a)] or in excess of the employee's normal working
hours or regular working hours, as the case may be[.]'' \141\ Section
7(e)(6) permits exclusion of premiums ``for work by the employee on
Saturdays, Sundays, holidays, or regular days of rest, or on the sixth
or seventh day of the workweek, where such premium rate is not less
than one and one-half times the rate established in good faith for like
work performed in nonovertime hours on other days[.]'' \142\ Section
7(e)(7) permits exclusion of premiums ``in pursuance of an applicable
employment contract or collective-bargaining agreement, for work
outside of the hours established in good faith by the contract or
agreement as the basic, normal, or regular workday (not exceeding eight
hours) or workweek (not exceeding the maximum workweek applicable to
such employee under subsection [7(a)], where such premium rate is not
less than one and one-half times the rate established in good faith by
the contract or agreement for like work performed during such workday
or workweek.'' \143\ Additionally, section 7(h)(2) provides that extra
compensation of the types described in sections 7(e)(5), (6), and (7)
is creditable toward overtime compensation owed under section
7(a).\144\ These are the only types of compensation excludable from the
regular rate that are also creditable toward overtime
compensation.\145\
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\140\ Id. 207(e)(5)-(7).
\141\ Id. 207(e)(5).
\142\ Id. 207(e)(6).
\143\ Id. 207(e)(7).
\144\ See id. 207(h)(2).
\145\ See 29 CFR 778.201(c).
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Sections 778.202, 778.203, 778.205, and 778.207 explain the
requirements for excluding from the regular rate the overtime premiums
described in sections 7(e)(5) and (6).\146\ Sections 778.202 and
778.202(e) refer to extra premium payments paid pursuant to
contracts.\147\ Similarly, Sec. 778.205 uses an example of an extra
premium payment paid pursuant to an employment ``agreement,'' \148\ and
Sec. 778.207(a) refers to ``contract premium rates[.]'' \149\
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\146\ See id. 778.202, .203, .205, .207.
\147\ See id. 778.202(a), (b), (e).
\148\ Id. 778.205.
\149\ Id. 778.207(a).
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The Department proposes amending Sec. Sec. 778.202 and 778.205 to
remove references to employment agreements and contracts in those
sections to eliminate any confusion that the overtime premiums
described in sections 7(e)(5) and (6) may be excluded only under
written contracts or agreements. These regulatory clarifications are
consistent with sections 7(e)(5) and (6) of the FLSA, neither of which
requires that the overtime premiums be paid pursuant to a formal
employment contract or collective bargaining agreement. Those statutory
exclusions contrast with section 7(e)(7), which explicitly requires
``an employment contract or collective-bargaining agreement'' to
exclude premiums ``for work outside of the hours established in good
faith by the contract or work agreement as the basic, normal, or
regular workday (not exceeding eight hours) or workweek[.]'' \150\
Exclusion of premium payments under sections 7(e)(5) and (6) turns on
deviation from the employee's normal work schedule. The removal of the
word ``contract'' from the regulations does not change the fact that,
while there need not be a formal contract or agreement under sections
7(e)(5) or (6), there must be a discernable schedule of hours and days
worked from which the excess or nonregular hours for which the overtime
premiums are paid are distinguishable.\151\ Relatedly, the Department
proposes to amend Sec. 778.207 to refer to the ``premium payments''
instead of ``contract premium rates.'' This change is consistent with
the description of the overtime premiums found in Sec. 778.201 and
removes any implication that all of the overtime premium payments must
be paid pursuant to a formal contract.
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\150\ 29 U.S.C. 207(e)(7).
\151\ Section 7(e)(5) allows exclusion of premiums for hours
``in excess of the employee's normal working hours or regular
working hours'' and section 7(e)(6) permits exclusion of premiums
for work on regular days of rest or on the sixth or seventh day of
the workweek. Thus, exclusion under these provisions requires a
discernable schedule.
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While the regulations at Sec. Sec. 778.202, 778.205, and 778.207
have, since 1950, referred to employment contracts and agreements when
describing the types of overtime premiums excludable under sections
7(e)(5) and (6),\152\ the Department has not interpreted the use of the
words ``contract'' or ``agreement'' to limit excludable overtime
premium payments to only those paid pursuant to a formal contract or
collective bargaining agreement.\153\ The Department has historically
evaluated the actual practice of the parties to determine if extra
payments are true overtime premiums that are excludable from the
regular rate.\154\ In the initial publication of part 778 in 1948, for
example, the Department emphasized the primacy of ``actual practice''
over any contractual terms when assessing whether extra payments were
true overtime premiums that could be excluded from the regular
rate.\155\
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\152\ See 15 FR 623 (the precursor to Sec. Sec. 778.202, .205,
and .207 was located in Sec. 778.5 in the 1950 version of the
regulations).
\153\ The FOH sections discussing sections 7(e)(5) and (6)
overtime premiums make no reference to the need for a contract, and
instead instructs investigators to look to the employee's normal
hours or days of work ``as established by agreement or practice.''
FOH 32e01; see also id. 32e04 (describing criteria for 207(e)(6)
overtime premium for work on special days without any reference to a
requirement that the compensation be paid pursuant to contract).
\154\ See 13 FR 4534 (Aug. 5, 1948) (codified at 29 CFR 778.2
(1948)).
\155\ Id. Those regulations stated that ``[t]he mere fact that a
contract calls for premium payments for work on Saturdays, Sundays,
holidays or at night would not necessarily prove that the higher
rate is [a non-excludable shift differential] paid merely because of
undesirable working hours if, as a matter of fact, the actual
practice of the parties shows that the payments are made because the
employees have previously worked a specified number of hours or
days, according to a bona fide standard.'' 29 CFR 778.2 (1948).
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Consistent with the Department's practice, most courts have not
required employers using the exclusions in sections 7(e)(5) and (6) to
establish the existence of any formal contract or agreement with
employees.\156\ Even apart from sections 7(e)(5) and (6), courts
interpreting the FLSA do not generally require that contracts be in
writing (unless specifically required by statute), and they likewise
emphasize the importance of the employer's actual
[[Page 11901]]
practices in determining whether a pay practice complies with the
FLSA.\157\
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\156\ See Fulmer v. City of St. Albans, W. Va., 125 Fed. App'x
459, 460 (4th Cir. Jan. 7, 2005) (holding that city properly
excluded overtime premiums from regular rate under 207(e)(5) even
though the premiums were not included in employment contract and
were mentioned only during the employment interview); Hesseltine v.
Goodyear Tire & Rubber Co., 391 F. Supp. 2d 509, 522 (E.D. Tex.
2005) (``If an employer voluntarily pays an employee a premium rate
contingent upon his working more than eight hours in one day, then
such payment may be excluded from the employee's regular rate and
credited toward unpaid overtime.''); Laboy v. Alex Displays, Inc.,
No. 02 C 8721, 2003 WL 21209854, at *4 (N.D. Ill. May 21, 2003)
(``The court need not determine whether the parties had an agreement
for purposes of [section] 7(e)(7) because the payments must be
excluded from the regular rate under [section] 7(e)(5).'').
\157\ See Bay Ridge, 334 U.S. at 464 (``As the regular rate
cannot be left to a declaration by the parties as to what is to be
treated as the regular rate for an employee, it must be drawn from
what happens under the employment contract.''); Singer v. City of
Waco, Tex., 324 F.3d 813, 824 (5th Cir. 2003) (same); see also 149
Madison Ave. Corp. v. Asselta, 331 U.S. 199, 204 (1947) (``[I]n
testing the validity of a wage agreement under the Act the courts
are required to look beyond that which the parties have purported to
do.'') (citing Walling v. Youngerman-Reynolds Hardwood Co., 325 U.S.
419, 424-25 (1945) (``Once the parties have decided upon the amount
of wages and the mode of payment the determination of the regular
rate becomes a matter of mathematical computation, the result of
which is unaffected by any designation of a contrary `regular rate'
in the wage contracts.'').
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The Department proposes to clarify these regulations to eliminate
unnecessary confusion concerning the excludability of payments under
sections 7(e)(5) and (6).\158\ These proposed changes would be limited
to the regulatory sections discussed in Sec. Sec. 778.202, 778.205,
and 778.207 and are not intended to affect the Department's
longstanding interpretation in other contexts that a required
``contract'' may consist of an oral agreement.\159\
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\158\ Although most courts do not require an employment contract
before applying the overtime premium credits found in sections
7(e)(5) or (6), there is evidence that the regulations have created
some confusion. See, e.g., Scott v. City of New York, 629 F. Supp.
2d 266, 269-70 (S.D.N.Y. 2009) (``The FLSA credits only three
categories of contractual compensation towards overtime compensation
mandated by the Act: premium pay for working more than a
contractually-established number of hours day or week, premium pay
at a rate of time and one-half for working on weekends and holidays,
and premium pay at a rate of time and one-half for working outside
of ordinary hours, such as a night shift.'') (emphasis in original);
Jarmon v. Vinson Guard Servs., Inc., No. 2:08-cv-2106-VEH, 2010 WL
11507029, at *14 (N.D. Ala. July 13, 2010) (``However, because there
is no evidence of a collective bargaining agreement or an employment
contract in this case, [section] 207(e)(5) is not applicable.'').
Moreover, the language of the regulations may cause confusion for
employers who are less familiar with WHD's practices or the relevant
case law.
\159\ See 29 CFR 778.204 (``[A]n employment contract for
purposes of section 7(e)(7) may be either written or oral.'').
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E. Clarification That Examples in Part 778 Are Not Exclusive
The Department recognizes that compensation practices can vary
significantly and will continue to evolve. In general, the FLSA does
not restrict the forms of ``remuneration'' that an employer may pay--
which may include an hourly rate, salary, commission, piece rate, a
combination thereof, or any other method--as long as the regular rate
is equal to at least the applicable minimum wage and non-exempt
employees are paid any overtime owed at one and one-half times the
regular rate. While the eight categories of excludable payments
enumerated in section 7(e)(1)-(8) are exhaustive,\160\ the Department
proposes to confirm in Sec. 778.1 that, unless otherwise indicated,
part 778 does not contain an exhaustive list of permissible or
impermissible compensation practices. Rather, it provides examples of
regular rate and overtime calculations that, by their terms, may or may
not comply with the FLSA, and the types of compensation excludable from
regular rate calculations under section 7(e). Because it is impossible
to address all the various compensation and benefits arrangements that
may exist between employers and employees, both now and in the future,
the Department proposes to specify in Sec. 778.1 that the examples set
forth in part 778 of the types of payments that are excludable under
section 7(e)(1)-(8) are not exhaustive; there may be other types of
payments not discussed or used as examples in part 778 that nonetheless
qualify as excludable payments under section 7(e)(1)-(8).
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\160\ See, e.g., O'Brien v. Town of Agawam, 350 F.3d 279, 294
(1st Cir. 2003); Caraballo v. City of Chicago, 969 F. Supp. 2d 1008,
1015 (N.D. Ill. 2013); see also 778.200(c).
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F. Basic Rate Calculations Under Section 7(g)(3)
Section 7(g) of the FLSA identifies three circumstances in which an
employer may calculate overtime compensation using a basic rate rather
than the regular rate, provided that the basic rate is established by
an agreement or understanding between the employer and employee,
reached before the performance of the work.\161\ The third of these,
identified in section 7(g)(3), allows for the establishment of a basic
rate of pay when the rate is ``authorized by regulation by the
Administrator as being substantially equivalent to the average hourly
earnings of the employee, exclusive of overtime premiums, in the
particular work over a representative period of time[.]'' \162\ Part
548 addresses the requirements for using such basic rates to compute
overtime pay under section 7(g)(3).\163\
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\161\ See 29 U.S.C. 207(g).
\162\ Id. 207(g)(3). By contrast, section 7(g)(1) allows for a
basic rate to be established for employees employed at piece rates,
and section 7(g)(2) allows for a basic rate to be established for
employees performing two or more kinds of work for which different
hourly or piece rates apply. Id. 207(g)(1)-(2). Only the basic rate
provided by section 7(g)(1) is limited to employees paid on a piece
rate basis. The Department proposes to clarify the cross reference
in Sec. 548.1 to the regulations for sections 7(g)(1) and (2),
which are at 29 CFR 778.415-.421.
\163\ See 29 CFR 548.1; see also id. 778.400-.401.
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Section 548.2 provides ten requirements for using a basic rate when
calculating overtime compensation.\164\ Section 548.3 discusses six
different authorized basic rates that may be used if the criteria in
Sec. 548.2 are met.\165\ Section 548.300 explains that these basic
rates ``have been found in use in industry and the Administrator has
determined that they are substantially equivalent to the straight-time
average hourly earnings of the employee over a representative period of
time.'' \166\ As relevant to this proposed rulemaking, Sec. 548.3
authorizes a basic rate that excludes ``additional payments in cash or
in kind which, if included in the computation of overtime under the
Act, would not increase the total compensation of the employee by more
than 50 cents a week on the average for all overtime weeks . . . in the
period for which such additional payments are made.'' \167\ Section
548.305(b) explains that, under Sec. 548.3(e), upon agreement or
understanding between an employer and employee, the basic rate may
exclude from the computation of overtime ``certain incidental payments
which have a trivial effect on the overtime compensation due.'' \168\
This section provides a nonexhaustive list of examples of payments that
may be excluded, so long as the payments would not increase an
employee's total compensation in any workweek by more than $0.50,
including ``modest housing,'' ``bonuses or prizes of various sorts,''
and compensation ``for soliciting or obtaining new business.'' \169\ It
also provides examples with specific amounts of additional payments to
illustrate the application of Sec. 548.3(e).\170\ The $0.50 amount is
also referenced in Sec. 548.400(b). The Department last updated these
regulations more than 50 years ago, in 1966.\171\
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\164\ See id. 548.2.
\165\ See id. 548.3.
\166\ Id. 548.300.
\167\ Id. 548.3(e).
\168\ Id. 548.305(b).
\169\ Id. 548.305(b).
\170\ See id. 548.305(c), (d), (f).
\171\ See 31 FR 6769.
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The Department proposes to update the $0.50 amount in Sec. Sec.
548.3, 548.305, and 548.400. Rather than provide a specific dollar or
cent amount, however, the Department proposes to replace the $0.50
language in these regulations with ``40 percent of the applicable
hourly minimum wage under section 6(a) of the Act.'' Notably, this is
the same methodology that the Department used in the past to update the
threshold. In 1955, the Department set the threshold
[[Page 11902]]
for excludable amounts in Sec. 548.3(e) at $0.30--which, at the time,
was 40 percent of the hourly minimum wage required under the FLSA
($0.75 per hour).\172\ Similarly, in 1966, after the minimum wage
increased to $1.25 per hour, the Department correspondingly increased
the threshold amount in Sec. 548.3(e) to $0.50--which, again, was 40
percent of the hourly minimum wage at the time.\173\ The current
minimum wage is $7.25 per hour, and 40 percent of $7.25 is $2.90. To
avoid the need for future rulemaking in response to any further minimum
wage increases, however, the Department proposes to replace the current
$0.50 references in Sec. Sec. 548.3(e), 548.305, and 548.400(b) with
``40 percent of the applicable minimum hourly wage under section 6(a)
of the Act.'' Relatedly, the Department also proposes to update the
examples provided in Sec. 548.305(c), (d), and (f) with updated dollar
amounts, and to fix a typographical error in Sec. 548.305(e) by
changing the phrase ``would not exceed'' to ``would exceed.'' The
Department invites comment as to this proposal, and specifically
invites comment as to (1) whether the additional payments that are
excludable if they would not increase total overtime compensation
should be tied to a percentage of the applicable minimum wage under the
Fair Labor Standards Act, or a percentage of the applicable minimum
wage under state or Federal law; and (2) whether 40 percent of the
applicable minimum wage is an appropriate threshold, or if this
proposed percentage should be increased or decreased.
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\172\ See 20 FR 5679.
\173\ See 31 FR 4149 (Mar. 9, 1966); 31 FR 6769.
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IV. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (PRA), 44 U.S.C. 3501 et seq.,
and its attendant regulations, 5 CFR part 1320, require the Department
to consider the agency's need for its information collections and their
practical utility, the impact of paperwork and other information
collection burdens imposed on the public, and how to minimize those
burdens. This NPRM does not require a collection of information subject
to approval by the Office of Management and Budget (OMB) under the PRA,
or affect any existing collections of information. The Department
welcomes comments on this determination.
V. Executive Order 12866, Regulatory Planning and Review; and Executive
Order 13563, Improved Regulation and Regulatory Review
A. Introduction
Under E.O. 12866, OMB's Office of Information and Regulatory
Affairs (OIRA) determines whether a regulatory action is significant
and, therefore, subject to the requirements of the E.O. and OMB
review.\174\ Section 3(f) of E.O. 12866 defines a ``significant
regulatory action'' as an action that is likely to result in a rule
that: (1) Has an annual effect on the economy of $100 million or more,
or adversely affects in a material way a sector of the economy,
productivity, competition, jobs, the environment, public health or
safety, or state, local, or tribal governments or communities (also
referred to as economically significant); (2) creates serious
inconsistency or otherwise interferes with an action taken or planned
by another agency; (3) materially alters the budgetary impacts of
entitlement grants, user fees, or loan programs, or the rights and
obligations of recipients thereof; or (4) raises novel legal or policy
issues arising out of legal mandates, the President's priorities, or
the principles set forth in the E.O. OIRA has determined that this
proposed rule is significant under section 3(f) of E.O. 12866.
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\174\ See 58 FR 51735 (Sept. 30, 1993).
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E.O. 13563 directs agencies to propose or adopt a regulation only
upon a reasoned determination that its benefits justify its costs; that
it is tailored to impose the least burden on society, consistent with
achieving the regulatory objectives; and that, in choosing among
alternative regulatory approaches, the agency has selected the
approaches that maximize net benefits. E.O. 13563 recognizes that some
benefits are difficult to quantify and provides that, when appropriate
and permitted by law, agencies may consider and discuss qualitatively
values that are difficult or impossible to quantify, including equity,
human dignity, fairness, and distributive impacts.
B. Economic Analysis
This economic analysis provides a quantitative analysis of
regulatory familiarization costs attributable to the proposed rule and
a qualitative analysis of other potential benefits, cost savings, and
transfers. This includes a discussion of cost savings resulting from
reduced litigation. As described above, this rule, if finalized as
proposed, clarifies existing regulations for employees and employers in
the 21st-century workplace with modern forms of compensation and
benefits. The Department believes that these updates will provide
clarity and flexibility for employers interested in providing such
benefits to their employees. The Department welcomes comments that
provide data or information regarding the potential benefits, cost
savings, and transfers of this proposed rule, which may help the
Department quantify such effects in the Final Rule's analysis.
1. Overview of Proposed Changes
This NPRM proposes several changes to the existing regulatory
language in 29 CFR part 778 to update and clarify the FLSA's regular
rate requirements, and proposes a change to 29 CFR part 548 addressing
a ``basic rate'' that can be used to calculate overtime compensation
under section 7(g)(3) of the FLSA when specific conditions are met.
Specifically, the Department's NPRM includes the following proposals:
A proposal to clarify in Sec. 778.219 that payments for
unused paid leave, including paid sick leave, may be excluded from an
employee's regular rate of pay;
A proposal to clarify in Sec. Sec. 778.218(b) and 778.320
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;
A proposal to clarify in Sec. 778.217 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;
A proposal to clarify in Sec. 778.217 that certain
reimbursements are per se reasonable and excludable from the regular
rate;
A proposal to eliminate the restriction in Sec. Sec.
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;
A proposal to clarify in Sec. 778.224 that the cost of
providing wellness programs, onsite specialist treatment, exercise
opportunities, employee discounts on retail goods and services, and
certain tuition benefits may be excluded from an employee's regular
rate of pay;
A proposal to clarify in Sec. 778.215 the types of
benefit plans that are
[[Page 11903]]
excludable as ``similar benefits for employees'' under section 7(e)(4);
A proposal to clarify in Sec. Sec. 778.202, 778.203,
778.205, and 778.207 that employers do not need a prior contract or
agreement with the employee(s) to exclude certain overtime premiums
described in sections 7(e)(5) and (6) of the FLSA;
A proposal to clarify and provide examples in Sec.
778.211 of discretionary bonuses that are excludable from an employee's
regular rate of pay under section 7(e)(3) of the FLSA;
A proposal to clarify in Sec. 778.1 that the examples of
compensation discussed in part 778 of the types of excludable payments
under section 7(e)(1)-(8) are not exhaustive; and
A proposal to increase, from $0.50 to a weekly amount
equivalent to 40 percent of the hourly federal minimum wage (currently
$2.90, or 40 percent of $7.25), the amount by which total compensation
would not be affected by the exclusion of certain additional payments
when using the ``basic rate'' to compute overtime provided by Sec.
548.3(e).
To measure potential costs, cost savings, benefits, and transfers
relative to a baseline of current practice, the Department has
attempted to distinguish between specific proposals that would change
existing requirements, and those that would merely clarify existing
requirements. Here, the Department believes that only two of the
proposals described above would constitute changes to existing
regulatory requirements: (1) The proposal to increase the threshold for
exclusion of certain payments when using the ``basic rate'' to compute
overtime under Sec. 548.3(e), from $0.50 to a weekly amount equivalent
to 40 percent of the hourly federal minimum wage (currently $2.90, or
40 percent of $7.25); and (2) the proposal to eliminate the restriction
in Sec. Sec. 778.221 and 778.222 that call-back pay and similar
payments must be ``infrequent and sporadic'' to be excludable from the
regular rate, while maintaining that such payments must not be so
regular that they are essentially prearranged. Both of these proposed
changes are deregulatory in nature.
The Department believes that all of the remaining proposals would
be clarifications consistent in substance with the existing regulations
and statute. Thus, none of the proposals in this NPRM would impose any
new regulatory requirements, or require any regulated entity (i.e., any
employer) to change its conduct to remain in compliance with the law.
2. Potential Costs
The only potential costs attributable to this proposed rulemaking
are regulatory familiarization costs. Familiarization costs represent
direct costs to businesses associated with reviewing any changes to
regulatory requirements caused by a final rule. Familiarization costs
do not include recurring compliance costs that regulated entities would
incur with or without a rulemaking.\175\ The Department calculated
regulatory familiarization costs by multiplying the estimated number of
firms likely to review the proposed rule by the estimated time to
review the rule and the average hourly compensation of a Compensation,
Benefits, and Job Analysis Specialist.
---------------------------------------------------------------------------
\175\ For example, time and resources spent on an annual basis
to train staff on FLSA compliance are not familiarization costs
attributable to any particular rulemaking, because an employer
incurs these kinds of recurring costs regardless of whether specific
parts of the regulations have been recently amended. To the extent
that this proposed rule would make certain regulatory requirements
easier to understand, the proposed rule may achieve a reduction in
these recurring compliance costs.
---------------------------------------------------------------------------
To calculate the cost associated with reviewing the rule, the
Department first estimated the number of firms likely to review the
proposed rule, when finalized.\176\ According to the data from the U.S.
Census Bureau's Statistics of U.S. Businesses (SUSB), there is a total
of 5,900,731 firms in the United States.\177\ The SUSB data shows that
3,643,737 firms have four or fewer employees.\178\ These small-sized
firms are less likely than larger firms to offer perks or benefits
similar to those addressed in this rulemaking (e.g., wellness programs,
on-site medical or specialty treatment, and so forth) and are typically
exempt from legislation mandating paid sick leave or scheduling-related
premium pay.\179\ Thus, the Department believes that firms with fewer
than five employees are unlikely to review this proposed rule. For the
purposes of estimating familiarization costs across all firms, the
Department believes that the 2,256,994 firms with five or more
employees--approximately 38 percent of all 5.9 million firms--represent
a reasonable proxy estimate of the total number of interested firms
expected to dedicate time learning about the proposed rule.
---------------------------------------------------------------------------
\176\ The Department assumes that familiarization for this
rulemaking will generally occur at the headquarters of each
interested firm, rather than at the establishment level. According
to a recent survey, just eight percent of surveyed employers
reported that their benefits are administered locally at different
``locations.'' See Soc'y for Human Res. Mgmt., 2017 Employee
Benefits Remaining Competitive in a Challenging Talent Marketplace,
https://www.shrm.org/hr-today/trends-and-forecasting/research-and-surveys/Documents/2017%20Employee%20Benefits%20Report.pdf.
\177\ U.S. Census Bureau, 2015 Statistics of U.S. Businesses
(SUSB) Annual Data Tables by Establishment Industry, https://www.census.gov/data/tables/2015/econ/susb/2015-susb-annual.html.
\178\ Id.
\179\ For example, none of the predictable scheduling ordinances
recently passed in New York City, San Francisco, and Seattle apply
to employers with fewer than 20 employees. See, e.g., S.F., Cal.,
Police Code art. 33G, 3300G.3 (2015) (applying to retail employers
with at least 20 employees); N.Y.C., N.Y., Admin. Code 20-1201
(2017) (applying to retail employers with at least 20 employees and
fast food employers with at least 30 affiliated enterprise or
franchise establishments); Seattle, Wash., Mun. Code 14.22.050
(2017) (applying to retail, food service, and full-service
restaurant employers with at least 500 employees). Similar coverage
thresholds apply to employers under state paid sick leave laws in
Maryland (15 employees), Oregon (10 employees with smaller employers
required to provide equivalent unpaid sick leave), and Rhode Island
(18 employees with smaller employers required to provide equivalent
unpaid sick leave). See Md. Code, Labor & Emp't Sec. 3-1304; Or.
Rev. Stat. Sec. 653.606; R.I. Gen. Laws Sec. 28-57-4(c).
---------------------------------------------------------------------------
Next, the Department estimated the time interested firms would take
to review the rule. Because the majority of the proposals discussed in
the NPRM are merely clarifications of existing regulatory requirements,
the Department estimates that it would take an average of approximately
15 minutes for each interested firm to review and understand the
changes in the rule. Some firms might spend more than 15 minutes
reviewing the proposed rule, while others might take less time; the
Department believes that 15 minutes is a reasonable estimated average
for all interested firms.
Finally, the Department estimated the hourly compensation of the
employees who would likely review the proposed rule. The Department
assumes that a Compensation, Benefits, and Job Analysis Specialist
(Standard Occupation Classification 13-1141), or an employee of similar
status and comparable pay, would review the rule at each firm. The mean
hourly wage of a Compensation, Benefits, and Job Analysis Specialist is
$32.29. The Department adjusted this base wage rate to reflect fringe
benefits such as health insurance and retirement benefits, as well as
overhead costs such as rent, utilities, and office equipment. The
Department used a fringe benefits rate of 46 percent of the base rate
and an overhead rate of 54 percent of the base rate, resulting in a
fully loaded hourly compensation rate for Compensation, Benefits, and
Job Analysis Specialists of $64.58 (= $32.29 + ($32.29 x 46%) + ($32.29
x 54%)).
Therefore, regulatory familiarization costs in Year 1 for
interested firms are estimated to be $36,439,168 (=
[[Page 11904]]
2,256,994 firms x 0.25 hours of review time x $64.58 per hour), which
amounts to a 10-year annualized cost of $4,147,361 at a discount rate
of 3 percent (which is $1.84 per firm) or $3,992,320 at a discount rate
of 7 percent (which is $1.77 per firm).
This 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 proposed rule. The Department invites comment on this analysis,
including any relevant data or information that may further inform this
estimate.
3. Potential Cost Savings
The Department believes that this proposed rule could lead to
potential cost savings. The clarifying proposals and updated examples
included in this NPRM may reduce the amount of time employers spend
attempting to understand their obligations under the law. For example,
employers interested in providing an employee discount program, a
wellness program, or onsite exercise opportunities would know
immediately from the language proposed for inclusion in Sec. 778.224
that the cost of providing such programs is excluded from the regular
rate, thereby avoiding the need for further research on the issue. In
addition, the two proposals that constitute changes to the regulations
would also achieve cost savings. For example, the Department expects
that the changes to the basic rate regulations will permit employers
that use a basic rate plan to give employees additional incidental
payments without concern about the impact on their overtime
obligations. Increasing the amount by which total compensation would
not be affected by the exclusion of certain additional payments when
using the ``basic rate'' to compute overtime would both eliminate
avoidable litigation and expand the circumstances in which employers
that meet the requirements to use a basic rate may exclude ``certain
incidental payments which have a trivial effect on the overtime
compensation due.''
The Department expects that these cost savings will outweigh
regulatory familiarization costs. Unlike familiarization costs, the
potential cost savings described in this section will continue into the
future, saving employers valuable time and resources.
The Department is unable to provide quantitative estimates for cost
savings and other potential effects of the proposed rule due to a lack
of data and uncertainty regarding employer responses to the proposals.
Employers are not generally required to report to the Department their
use of these regulatory provisions, and to the Department's knowledge,
there is no publically available data on items such as employers' use
of basic rate calculations to calculate overtime due. The Department
welcomes comments providing data or information regarding possible cost
savings attributable to this proposed rule, which may help the
Department further quantify these effects in a Final Rule analysis.
The Department is unable to provide quantitative estimates for
other potential effects of the proposed rule due to a lack of data and
uncertainty regarding employer responses to the proposals. The
Department welcomes comments providing data or information regarding
possible cost savings attributable to this proposed rule, which may
help the Department further quantify these effects in a Final Rule
analysis.
4. Potential Benefits
This section analyzes the potential benefits if the rule is
finalized as proposed. The Department was unable to provide
quantitative estimates for these potential benefits due to a lack of
data and uncertainty regarding potential employer responses to the
proposed rule. The Department does not know, for example, how many
employers will begin offering wellness programs or other benefits to
their employees as a result of this rule. The Department welcomes
comments providing data or information regarding possible benefits
attributable to this proposed rule, which may help the Department
quantify these effects in a Final Rule analysis.
Distinct from the potential cost savings described above, if
finalized as proposed, the rule will likely yield benefits. The
Department expects that the added clarity that this rule would provide
will encourage some employers to start providing benefits that they may
presently refrain from providing due to apprehension about potential
overtime consequences. These newly provided benefits might have a
positive impact on workplace morale, employee health, employee
compensation, and employee retention.
For example, the Department has proposed adding ``the cost to the
employer of providing wellness programs, such as health risk
assessments, biometric screenings, vaccination clinics (including
annual flu vaccinations), nutrition classes, weight loss programs,
smoking cessation programs, stress reduction programs, exercise
programs, and coaching to help employees meet health goals'' to the
list of miscellaneous payments excludable from the regular rate
provided in Sec. 778.224(b). If employers know they can offer wellness
programs without the threat of potentially protracted class or
collective action litigation and without potentially having to track
employee participation in these activities for purposes of calculating
the regular rate, employers might feel more encouraged to offer such
programs. An increase in the provision of wellness programs similar to
those described in the proposed rule (e.g., smoking cessation programs,
vaccine clinics, and so forth) may improve worker health and reduce
healthcare costs.\180\ Such improvements benefit both the worker and
the employer with added value to each.
---------------------------------------------------------------------------
\180\ According to a recent survey, 88 percent of employers with
a wellness program rated their initiatives as somewhat or very
effective in improving employee health, while 77 percent indicated
their wellness program was somewhat or very effective in reducing
health care costs. See Soc. for Human Res. Mgmt., 2017 Employee
Benefits Remaining Competitive in a Challenging Talent Marketplace,
https://www.shrm.org/hr-today/trends-and-forecasting/research-and-surveys/Documents/2017%20Employee%20Benefits%20Report.pdf.
---------------------------------------------------------------------------
The proposed rule would also provide employers greater flexibility
and incentivize greater creativity in their employee-benefits
practices. This room to innovate may help workers and increase
retention and productivity by allowing employers the chance to provide
unique benefits that their employees want and that improve workers'
physical and mental health, work environment, and morale. As noted
earlier in this NPRM, the Department cannot feasibly list every
permissible benefit that employers may provide employers, and employers
may create new and desirable benefits in the future. But the Department
believes that the changes it proposes here would foster that
innovation.
In addition, the Department believes that clarifying the
regulations would prevent many avoidable ``regular rate'' disputes. For
example, the omission of unused sick leave in the current version of
Sec. 778.219 could be responsible for disputes over whether payments
for unused sick leave should be included in the regular rate. Although
the Department's proposal to amend Sec. 778.219 simply reflects the
Department's current guidance, the added clarity provided by changing
the text of the regulations might prevent future expenses stemming from
avoidable workplace disputes. Due to uncertainty regarding the costs
and prevalence of FLSA-related settlement agreements, arbitration
actions, and state court filings, the Department has only estimated
cost savings attributable
[[Page 11905]]
to an expected reduction in federal FLSA regular rate lawsuits--which
may represent only a fraction of all regular rate litigation.
To estimate the number of federal lawsuits that the proposed rule
may prevent, the Department first attempted to determine the percentage
of FLSA lawsuits that predominantly or exclusively feature a ``regular
rate'' dispute. Here, the Department studied two sets of data. First,
the Department examined a randomly selected sample of federal FLSA
court filings from 2014 taken from the U.S. Court's Public Access to
Court Electronic Records (PACER). After reviewing each of the 521 FLSA
cases in this sample for relevant information, the Department found
that 6.5 percent of the cases (34 out of 521) primarily featured a
regular rate dispute. To corroborate the PACER data, the Department
separately reviewed a sample of 258 federal court decisions from 2017
involving FLSA collective action certification claims,\181\ and found
that 3.9 percent of these cases primarily centered around a regular
rate dispute (10 out of 258). Considering these two different
percentages, the Department takes an approximate average and
conservatively assumes that approximately five percent of all FLSA
cases primarily or exclusively involve a regular rate dispute.
---------------------------------------------------------------------------
\181\ Seyfarth Shaw LLP, 14th Annual Workplace Class Action
Litigation Report 127-270 (2018), https://www.seyfarth.com/dir_docs/publications/2018_workplace_class_action_report.pdf.
---------------------------------------------------------------------------
According to the Transactional Records Access Clearinghouse, 25,605
federal FLSA lawsuits were filed in Fiscal Years 2015, 2016, and 2017,
averaging 8,535 lawsuits per year.\182\ Assuming there are
approximately 8,535 FLSA lawsuits per year, the Department estimates
that about 427 cases, or 5 percent of 8,535, primarily or exclusively
involve a regular rate dispute. Given data limitations, if the
Department assumes for purposes of this analysis that this proposed
rule would prevent approximately 10 percent of FLSA cases primarily or
exclusively featuring a regular rate dispute then this proposed rule
would prevent approximately 43 FLSA regular rate lawsuits per
year.\183\
---------------------------------------------------------------------------
\182\ TRAC at Syracuse University uses the Freedom of
Information Act (FOIA) to obtain data about government enforcement
and regulatory activities. According to TRAC Reports, the following
numbers of FLSA lawsuits were filed in Fiscal Years 2015, 2016, and
2017: 8917, 8830, and 7858. See TRAC Reports, Fair Labor Standards
Act Lawsuits Down from 2015 Peak (2018), http://trac.syr.edu/tracreports/civil/498/.
\183\ The Department rounds up to 43 cases for purpose of
estimating (10 percent of 427 cases equals 42.7 cases).
---------------------------------------------------------------------------
To quantify the cost savings for an expected reduction in FLSA
lawsuits, the Department must estimate the average cost of an FLSA
lawsuit. Here, the Department examined a selection of 56 FLSA cases
concluded between 2012 and 2015 that contained litigation cost
information.\184\ To calculate average litigation costs associated with
these cases, the Department first examined records of court filings in
the Westlaw Case Evaluator tool and on PACER to ascertain how much
plaintiffs in these cases received for attorney fees, administrative
fees, and/or other costs, apart from any monetary damages attributable
to the alleged FLSA violations. (The FLSA provides for successful
plaintiffs to be awarded reasonable attorney's fees and costs, so this
data is available in some FLSA cases.) After determining the
plaintiff's total litigation costs for each case, the Department then
doubled the figures to account for litigation costs that the defendant
employers incurred.\185\ According to this analysis, the average
litigation cost for FLSA cases concluded between 2012 and 2015 was
$654,182 per case.\186\ Applying this figure to approximately 43
federal regular rate cases that this proposed rulemaking could prevent,
the Department estimated that avoided litigation costs resulting from
the rule may total approximately $28.1 million per year. Once again,
the Department believes this total may underestimate total litigation
costs because some FLSA regular rate cases are heard in state court and
thus were not captured by PACER; some FLSA regular rate matters are
resolved before litigation or by alternative dispute resolution; and
some attorneys representing FLSA regular rate plaintiffs may take a
contingency fee atop their statutorily awarded fees and costs. The
Department solicits comments or available data on this issue.
---------------------------------------------------------------------------
\184\ The 56 cases used for this analysis were retrieved from
Westlaw's Case Evaluator database using a keyword search for case
summaries between 2012 and 2015 mentioning the terms ``FLSA'' and
``fees.'' Although the initial search yielded 64 responsive cases,
the Department excluded one duplicate case, one case resolving
litigation costs through a confidential settlement agreement, and
six cases where the defendant employer(s) ultimately prevailed.
Because the FLSA only entitles prevailing plaintiffs to litigation
cost awards, information about litigation costs was only available
for the remaining 56 FLSA cases that ended in settlement agreements
or court verdicts favoring the plaintiff employees.
\185\ This is likely a conservative approach to estimate the
total litigation costs for each FLSA lawsuit, as defendant employers
tend to incur greater litigation costs than plaintiff employees
because of, among other things, typically higher discovery costs.
\186\ The median cost was $111,835 per lawsuit.
---------------------------------------------------------------------------
5. Potential Transfers
Transfer payments occur when income is redistributed from one party
to another. The Department has identified two possible transfer
payments between employers and employees that could occur if the rule
is finalized as proposed, flowing in opposite directions. On the one
hand, income might transfer from employers to employees if some
employers respond by newly providing certain payments or benefits they
did not previously provide. On the other hand, income might transfer
from employees to employers if some employers respond to the proposed
rule by newly excluding certain payments from their employees' regular
rates without changing any other compensation practices. As discussed
above, the Department is unable to quantify an estimated net transfer
amount to employers or employees due to a lack of data on the kinds of
payments employers presently provide, and the inherent uncertainty in
predicting how employers will respond to this rule. The Department
invites comment on this analysis, including any relevant data or
information that might allow for a quantitative analysis of transfer
effects in the Final Rule.
6. Summary
The Department above discussed qualitatively the potential cost
savings associated with reduced litigation, and estimates those cost
savings at $281 over 10 years, or $28.1 per year. The Department
estimates that this proposed rule, if finalized, would result in one-
time regulatory familiarization costs of $36.4 million, which would
result in a 10-year annualized cost of $4,147,361 at a discount rate of
3 percent or $3,992,320 at a discount rate of 7 percent.
VI. Regulatory Flexibility Analysis
In accordance with the Regulatory Flexibility Act,\187\ the
Department examined the regulatory requirements of the proposed rule to
determine whether they would have a significant economic impact on a
substantial number of small entities. The Department believes that this
proposed rule would achieve long-term cost savings that outweigh
initial regulatory familiarization costs.\188\ For
[[Page 11906]]
example, the Department believes that removing ambiguous language and
adding updated examples to the FLSA's overtime regulations should
reduce compliance costs and litigation risks that small business
entities would otherwise continue to bear.
---------------------------------------------------------------------------
\187\ See 5 U.S.C. 601 et seq. (as amended).
\188\ This 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.
---------------------------------------------------------------------------
As discussed above, the Department used data from the U.S. Census
Bureau's Statistics of U.S. Businesses (SUSB) to calculate the number
of firms likely to review the proposed rule, when finalized. The SUSB
data show that there are 5,900,731 firms in the U.S., 3,643,737 of
which have four or fewer employees.\189\ Also, as discussed above, the
Department believes that firms with fewer than five employees are
unlikely to review this proposed rule, because these small-sized firms
are less likely than larger firms to offer perks or benefits similar to
those addressed in this rulemaking (e.g., wellness programs, on-site
medical or specialty treatment, and so forth) and are typically exempt
from legislation mandating paid sick leave or scheduling-related
premium pay.\190\ Familiarization costs would therefore be zero for
small businesses with fewer than five employees. The Department did
estimate familiarization costs across all 2,256,994 firms with five or
more employees, and found that the annualized familiarization cost per
firm is $1.84 annually at a discount rate of 3 percent and $1.77
annually at a discount rate of 7 percent.
---------------------------------------------------------------------------
\189\ Id.
\190\ For example, none of the predictable scheduling ordinances
recently passed in New York City, San Francisco, and Seattle apply
to employers with fewer than 20 employees. See, e.g., S.F., Cal.,
Police Code art. 33G, 3300G.3 (2015) (applying to retail employers
with at least 20 employees); N.Y.C., N.Y., Admin. Code 20-1201
(2017) (applying to retail employers with at least 20 employees and
fast food employers with at least 30 affiliated enterprise or
franchise establishments); Seattle, Wash., Mun. Code 14.22.050
(2017) (applying to retail, food service, and full-service
restaurant employers with at least 500 employees). Similar coverage
thresholds apply to employers under state paid sick leave laws in
Maryland (15 employees), Oregon (10 employees with smaller employers
required to provide equivalent unpaid sick leave), and Rhode Island
(18 employees with smaller employers required to provide equivalent
unpaid sick leave). See Md. Code, Labor & Emp't Sec. 3-1304; Or.
Rev. Stat. Sec. 653.606; R.I. Gen. Laws Sec. 28-57-4(c).
---------------------------------------------------------------------------
Estimated familiarization costs would be trivial for small business
entities, and would be well below one percent of their gross annual
revenues. The average annual gross revenue for the smallest businesses
is typically $100,000 or higher. Therefore, the Department certifies
that the rule does not have a significant economic impact on a
substantial number of small entities.
VII. Unfunded Mandates Reform Act Analysis
The Unfunded Mandates Reform Act of 1995 (UMRA), 2 U.S.C. 1532,
requires that agencies prepare a written statement, which includes an
assessment of anticipated costs and benefits, before proposing any
federal mandate that may result in excess of $100 million (adjusted
annually for inflation) in expenditures in any one year by state,
local, and tribal governments in the aggregate, or by the private
sector. While this rulemaking would affect employers in the private
sector, it is not expected to result in expenditures greater than $100
million in any one year. Please see Section V for an assessment of
anticipated costs and benefits to the private sector.
VIII. Executive Order 13132, Federalism
The Department has reviewed this proposed rule in accordance with
Executive Order 13132 regarding federalism and determined that it does
not have federalism implications. The proposed rule would not have
substantial direct effects on the States, on the relationship between
the national government and the States, or on the distribution of power
and responsibilities among the various levels of government.
IX. Executive Order 13175, Indian Tribal Governments
This proposed rule would not have substantial direct effects on one
or more Indian tribes, on the relationship between the Federal
Government and Indian tribes, or on the distribution of power and
responsibilities between the Federal Government and Indian tribes.
List of Subjects
29 CFR Part 548
Wages.
29 CFR Part 778
Wages.
Signed at Washington, DC, this 20th day of March, 2019.
Keith E. Sonderling,
Acting Administrator, Wage and Hour Division.
For the reasons set out in the preamble, the Department of Labor
proposes to amend title 29 of the Code of Federal Regulations parts 548
and 778 as follows:
PART 548--AUTHORIZATION OF ESTABLISHED BASIC RATES FOR COMPUTING
OVERTIME PAY
0
1. The authority citation for Part 548 continues to read as follows:
Authority: Sec. 7. 52 Stat. 1063, as amended; 29 U.S.C. 207,
unless otherwise noted.
0
2. Amend Sec. 548.1 by revising the second sentence to read as
follows:
Sec. 548.1 Scope and effect of regulations.
* * * * *
The regulations for computing overtime pay under sections 7(g)(1)
and 7(g)(2) of the Act for employees paid on the basis of a piece rate,
or at a variety of hourly rates or piece rates, or a combination
thereof, are set forth in 29 CFR 778.415-778.421.
0
3. Revise paragraph (e) of Sec. 548.3 to read as follows:
Sec. 548.3 Authorized basic rates.
* * * * *
(e) The rate or rates (not less than the rates required by section
6 (a) and (b) of the Act) which may be used under the Act to compute
overtime compensation of the employee but excluding additional payments
in cash or in kind which, if included in the computation of overtime
under the Act, would not increase the total compensation of the
employee by more than 40 percent of the applicable hourly minimum wage
under section 6(a) of the Act per week on the average for all overtime
weeks (in excess of the number of hours applicable under section 7(a)
of the Act) in the period for which such additional payments are made.
* * * * *
0
4. Amend Sec. 548.305 by revising paragraphs (a), (c), (d), (e), (f)
to read:
Sec. 548.305 Excluding certain additions to wages.
(a) Section 548.3(e) authorizes as established basic rates the rate
or rates (not less than the minimum wages required by section 6(a) and
(b) of the Act) which may be used under the Act to compute overtime
compensation of employees but excluding additional cash or in kind
payments which, if included in the computation of overtime, would not
increase the total compensation of an employee by more than 40 percent
of the applicable hourly minimum wage under section 6(a) of the Act per
week on the average for all overtime weeks in the period for which such
additional payments are made.
* * * * *
(c) The exclusion of one or more additional payments under Sec.
548.3(e) must not affect the overtime
[[Page 11907]]
compensation of the employee by more than 40 percent of the applicable
hourly minimum wage under section 6(a) of the Act per week on the
average for the overtime weeks.
(1) Example. An employee, who normally would come within the 40-
hour provision of section 7(a) of the Act, is paid a cost-of-living
bonus of $1300 each calendar quarter, or $100 per week. The employee
works overtime in only 2 weeks in the 13-week period, and in each of
these overtime weeks he works 50 hours. He is therefore entitled to $10
as overtime compensation on the bonus for each week in which overtime
was worked (i.e., $100 bonus divided by 50 hours equals $2 an hour; 10
overtime hours, times one-half, times $2 an hour, equals $10 per week).
Forty percent of the minimum wage of $7.25 is $2.90. Since the overtime
on the bonus is more than $2.90 on the average for the 2 overtime
weeks, this cost-of-living bonus would be included in the overtime
computation under Sec. 548.3(e).
(2) Reserved.
(d) It is not always necessary to make elaborate computations to
determine whether the effect of the exclusion of a bonus or other
incidental payment on the employee's total compensation will exceed 40
percent of the applicable hourly minimum wage under section 6(a) of the
Act cents per week on the average. Frequently the addition to regular
wages is so small or the number of overtime hours is so limited that
under any conceivable circumstances exclusion of the additional
payments from the rate used to compute the employee's overtime
compensation would not affect the employee's total earnings by more
than 40 percent of the applicable hourly minimum wage under section
6(a) of the Act per week. The determination that this is so may be made
by inspection of the payroll records or knowledge of the normal working
hours.
(1) Example. An employer has a policy of giving employees who have
a perfect attendance record during a 4-week period a bonus of $50. The
employee never works more than 50 hours a week. It is obvious that
exclusion of this attendance bonus from the rate of pay used to compute
overtime compensation could not affect the employee's total earnings by
more than $2.90 per week (i.e., 40 percent of the minimum wage of
$7.25).\14\
(2) Reserved.
\14\ For a 50-hour week, an employee's bonus would have to exceed
$29 a week to affect his overtime compensation by more than $2.90
(i.e., 40 percent of the minimum wage of $7.25). ($30 / 50 hours
worked x 10 overtime hours x 0.5)
(e) There are many situations in which the employer and employee
cannot predict with any degree of certainty the amount of bonus to be
paid at the end of the bonus period. They may not be able to anticipate
with any degree of certainty the number of hours an employee might work
each week during the bonus period. In such situations, the employer and
employee may agree prior to the performance of the work that a bonus
will be disregarded in the computation of overtime pay if the
employee's total earnings are not affected by more than 40 percent of
the applicable hourly minimum wage under section 6(a) of the Act per
week on the average for all overtime weeks during the bonus period. If
it turns out at the end of the bonus period that the effect on the
employee's total compensation would exceed 40 percent of the applicable
minimum wage under section 6(a) of the Act per week on the average,
then additional overtime compensation must be paid on the bonus. (See
Sec. 778.209 of this chapter, for an explanation of how to compute
overtime on the bonus).
(f) In order to determine whether the exclusion of a bonus or other
incidental payment would affect the total compensation of the employee
by not more than 40 percent of the applicable hourly minimum wage under
section 6(a) of the Act per week on the average, a comparison is made
between his total compensation computed under the employment agreement
and his total compensation computed in accordance with the applicable
overtime provisions of the Act.
(1) Example. An employee, who normally would come within the 40-
hour provision of section 7(a) of the Act, is paid at piece rates and
at one and one-half times the applicable piece rates for work performed
during hours in excess of 40 in the workweek. The employee is also paid
a bonus, which when apportioned over the bonus period, amounts to $10 a
week. He never works more than 50 hours a week. The piece rates could
be established as basic rates under the employment agreement and no
additional overtime compensation paid on the bonus. The employee's
total compensation computed in accordance with the applicable overtime
provision of the Act, section 7(g)(1) \15\ would be affected by not
more than $1 in any week by not paying overtime compensation on the
bonus.\16\
(2) Reserved.
\15\ Section 7(g)(1) of the Act provides that overtime compensation
may be paid at one and one-half times the applicable piece rate but
extra overtime compensation must be properly computed and paid on
additional pay required to be included in computing the regular
rate.
\16\ Bonus of $10 divided by fifty hours equals 20 cents an hour.
Half of this hourly rate multiplied by ten overtime hours equals $1.
0
5. Revise paragraph (b) of Sec. 548.400 to read as follows:
Sec. 548.400 Procedures.
* * * * *
(b) Prior approval of the Administrator is also required if the
employer desires to use a basic rate or basic rates which come within
the scope of a combination of two or more of the paragraphs in Sec.
548.3 unless the basic rate or rates sought to be adopted meet the
requirements of a single paragraph in Sec. 548.3. For instance, an
employee may receive free lunches, the cost of which, by agreement or
understanding, is not to be included in the rate used to compute
overtime compensation.\17\ In addition, the employee may receive an
attendance bonus which, by agreement or understanding, is to be
excluded from the rate used to compute overtime compensation.\18\ Since
these exclusions involve two paragraphs of Sec. 548.3, prior approval
of the Administrator would be necessary unless the exclusion of the
cost of the free lunches together with the attendance bonus do not
affect the employee's overtime compensation by more than 40 percent of
the applicable hourly minimum wage under section 6(a) of the Act per
week on the average, in which case the employer and the employee may
treat the situation as one falling within a single paragraph, Sec.
548.3(e).
\17\ See Sec. 548.304.
\18\ See Sec. 548.305.
PART 778--OVERTIME COMPENSATION
0
6. The authority citation for part 778 continues to read as follows:
Authority: 52 Stat. 1060, as amended; 29 U.S.C. 201 et seq.
Section 778.200 also issued under Public Law 106-202, 114 Stat. 308
(29 U.S.C. 207(e) and (h)).
0
7. Revise Sec. 778.1 to read as follows:
Sec. 778.1 Purpose of interpretive bulletin.
(a) This part 778 constitutes the official interpretation of the
Department of Labor with respect to the meaning and application of the
maximum hours and overtime pay requirements contained in section 7 of
the Fair Labor Standards Act (the Act). It is the purpose of this
bulletin to make available in one place the interpretations of these
provisions which will guide the Secretary of Labor and the
Administrator in the performance of their duties under the
[[Page 11908]]
Act unless and until they are otherwise directed by authoritative
decisions of the courts or conclude, upon reexamination of an
interpretation, that it is incorrect. These official interpretations
are issued by the Administrator on the advice of the Solicitor of
Labor, as authorized by the Secretary (Reorg. Pl. 6 of 1950, 64 Stat.
1263; Gen. Ord. 45A, May 24, 1950, 15 FR 3290).
(b) The Department recognizes that compensation practices can vary
significantly and will continue to evolve in the future. The Department
also recognizes that it is not feasible to address all of the various
compensation and benefits arrangements that may exist between employers
and employees, both currently and in the future. In general, the FLSA
does not restrict the forms of ``remuneration'' that an employer may
pay--which may include an hourly rate, salary, commission, piece rate,
a combination thereof, or any other method--as long as the regular rate
is equal to at least the applicable minimum wage and compensation for
overtime hours worked is paid at the rate of at least one and one-half
times the regular rate. While the eight categories of payments in
section 7(e)(1)-(8) of the Act are the exhaustive list of payments
excludable from the regular rate, Part 778 does not contain an
exhaustive list of permissible or impermissible compensation practices
under section 7(e) of the Act, unless otherwise indicated. Rather, it
provides examples of regular rate and overtime calculations under the
FLSA and the types of compensation that may be excluded from regular
rate calculations under section 7(e) of the FLSA.
0
8. Revise paragraphs (a), (b), (c), and (e) of Sec. 778.202 to read as
follows:
Sec. 778.202 Premium pay for hours in excess of a daily or weekly
standard.
(a) Hours in excess of 8 per day or statutory weekly standard. Many
employers provide for the payment of overtime compensation for hours
worked in excess of 8 per day or 40 per week. If the payment of such
overtime compensation is in fact contingent upon the employee's having
worked in excess of 8 hours in a day or in excess of the number of
hours in the workweek specified in section 7(a) of the Act as the
weekly maximum and such hours are reflected in an agreement or by
established practice, the extra premium compensation paid for the
excess hours is excludable from the regular rate under section 7(e)(5)
of the Act and may be credited toward statutory overtime payments
pursuant to section 7(h) of the Act. In applying these rules to
situations where it is the custom to pay employees for hours during
which no work is performed due to vacation, holiday, illness, failure
of the employer to provide sufficient work, or other similar cause, as
these terms are explained in Sec. Sec. 778.216-778.224, it is
permissible (but not required) to count these hours as hours worked in
determining the amount of overtime premium pay, due for hours in excess
of 8 per day or the applicable maximum hours standard, which may be
excluded from the regular rate and credited toward the statutory
overtime compensation.
(b) Hours in excess of normal or regular working hours. Similarly,
where the employee's normal or regular daily or weekly working hours
are greater or fewer than 8 hours and 40 hours respectively and such
hours are reflected in an agreement or by established practice, and the
employee receives payment of premium rates for work in excess of such
normal or regular hours of work for the day or week (such as 7 in a day
or 35 in a week), the extra compensation provided by such premium
rates, paid for excessive hours, is a true overtime premium to be
excluded from the regular rate and it may be credited toward overtime
compensation due under the Act.
(c) Premiums for excessive daily hours. If an employee whose
maximum hours standard is 40 hours is hired at the rate of $12 an hour
and receives, as overtime compensation under his contract, $12.50 per
hour for each hour actually worked in excess of 8 per day (or in excess
of his normal or regular daily working hours), his employer may exclude
the premium portion of the overtime rate from the employee's regular
rate and credit the total of the extra 50-cent payments thus made for
daily overtime hours against the overtime compensation which is due
under the statute for hours in excess of 40 in that workweek. If the
same contract further provided for the payment of $13 for hours in
excess of 12 per day, the extra $1 payments could likewise be credited
toward overtime compensation due under the Act. To qualify as overtime
premiums under section 7(e)(5) of the Act, the daily overtime premium
payments must be made for hours in excess of 8 hours per day or the
employee's normal or regular working hours. If the normal workday is
artificially divided into a ``straight time'' period to which one rate
is assigned, followed by a so-called ``overtime'' period for which a
higher ``rate'' is specified, the arrangement will be regarded as a
device to contravene the statutory purposes and the premiums will be
considered part of the regular rate. For a fuller discussion of this
problem, see Sec. 778.501.
* * * * *
(e) Premium pay for sixth or seventh day worked. Under sections
7(e)(6) and 7(h) of the Act, extra premium compensation paid for work
on the sixth or seventh day worked in the workweek (where the workweek
schedule is reflected in an agreement or by established practice) is
regarded in the same light as premiums paid for work in excess of the
applicable maximum hours standard or the employee's normal or regular
workweek.
0
9. Revise paragraph (d) of Sec. 778.203 to read as follows:
Sec. 778.203 Premium Pay for work on Saturdays, Sundays, and other
``special days''.
* * * * *
(d) Payment of premiums for work performed on the ``special day'':
To qualify as an overtime premium under section 7(e)(6) of the Act, the
premium must be paid because work is performed on the days specified
and not for some other reason which would not qualify the premium as an
overtime premium under sections 7(e)(5), (6), or (7) of the Act. (For
examples distinguishing pay for work on a holiday from idle holiday
pay, see Sec. 778.219.) Thus a premium rate paid to an employee only
when he received less than 24 hours' notice that he is required to
report for work on his regular day of rest is not a premium paid for
work on one of the specified days; it is a premium imposed as a penalty
upon the employer for failure to give adequate notice to compensate the
employee for the inconvenience of disarranging his private life. The
extra compensation is not an overtime premium. It is part of his
regular rate of pay unless such extra compensation is paid the employee
so as to qualify for exclusion under section 7(e)(2) of the Act in
which event it need not be included in computing his regular rate of
pay, as explained in Sec. 778.222.
0
10. Revise Sec. 778.205 to read as follows:
Sec. 778.205 Premiums for weekend and holiday work--example.
The application of section 7(e)(6) of the Act may be illustrated by
the following example: Suppose, based on an established practice by an
employer, an employee earns $18 an hour for all hours worked on a
holiday or on Sunday in the operation of machines by operators whose
maximum hours standard is 40 hours and who are paid a bona fide hourly
rate of $12 for like work performed during nonovertime
[[Page 11909]]
hours on other days. Suppose further that the workweek of such an
employee begins at 12:01 a.m. Sunday, and in a particular week he works
a schedule of 8 hours on Sunday and on each day from Monday through
Saturday, making a total of 56 hours worked in the workweek. Tuesday is
a holiday. The payment of $768 to which the employee is entitled will
satisfy the requirements of the Act since the employer may properly
exclude from the regular rate the extra $48 paid for work on Sunday and
the extra $48 paid for holiday work and credit himself with such amount
against the statutory overtime premium required to be paid for the 16
hours worked over 40.
0
11. Revise paragraph (a) of Sec. 778.207 to read as follows:
Sec. 778.207 Other types of contract premium pay distinguished.
(a) Overtime premiums are those defined by the statute. The various
types of premium payments which provide extra compensation qualifying
as overtime premiums to be excluded from the regular rate (under
sections 7(e)(5), (6), and (7) of the Act and credited toward statutory
overtime pay requirements (under section 7(h)) have been described in
Sec. Sec. 778.201 through 778.206. The plain wording of the statute
makes it clear that extra compensation provided by premium rates other
than those described in the statute cannot be treated as overtime
premiums. When such other premiums are paid, they must be included in
the employee's regular rate before statutory overtime compensation is
computed; no part of such premiums may be credited toward statutory
overtime pay.
* * * * *
0
12. Revise paragraphs (c) and (d) of Sec. 778.211 to read as follows:
Sec. 778.211 Discretionary bonuses
* * * * *
(c) Promised bonuses not excluded. The bonus, to be excluded under
section 7(e)(3)(a) of the Act, must not be paid ``pursuant to any prior
contract, agreement, or promise.'' For example, any bonus which is
promised to employees upon hiring or which is the result of collective
bargaining would not be excluded from the regular rate under this
provision of the Act. Bonuses which are announced to employees to
induce them to work more steadily or more rapidly or more efficiently
or to remain with the firm are regarded as part of the regular rate of
pay. Most attendance bonuses, individual or group production bonuses,
bonuses for quality and accuracy of work, bonuses contingent upon the
employee's continuing in employment until the time the payment is to be
made and the like are in this category; in such circumstances they must
be included in the regular rate of pay.
(d) Labels are not determinative. The label assigned to a bonus
does not conclusively determine whether a bonus is discretionary under
section 7(e)(3) of the Act. Instead, the terms of the statute and the
facts specific to the bonus at issue determine whether bonuses are
excludable discretionary bonuses. Thus, regardless of the label or name
assigned to bonuses, bonuses are discretionary and excludable if both
the fact that the bonuses are to be paid and the amounts are determined
at the sole discretion of the employer at or near the end of the
periods to which the bonuses correspond and they are not paid pursuant
to any prior contract, agreement, or promise causing the employee to
expect such payments regularly. Examples of bonuses that may be
discretionary include bonuses to employees who made unique or
extraordinary efforts which are not awarded according to pre-
established criteria, severance bonuses, bonuses for overcoming
challenging or stressful situations, employee-of-the-month bonuses, and
other similar compensation. Such bonuses are usually not promised in
advance and the fact and amount of payment is in the sole discretion of
the employer until at or near the end of the period to which the bonus
corresponds.
0
13. Amend Sec. 778.215 by revising paragraphs (a)(1), (a)(2), and (b)
to read as follows:
Sec. 778.215 Conditions for exclusion of benefit-plan contributions
under section 7(e)(4).
(a) * * *
(1) The contributions must be made pursuant to a specific plan or
program adopted by the employer, or by contract as a result of
collective bargaining, and communicated to the employees. This may be
either a company-financed plan or an employer-employee contributory
plan.
(2) The primary purpose of the plan must be to provide
systematically for the payment of benefits to employees on account of
death, disability, advanced age, retirement, illness, medical expenses,
hospitalization, accident, unemployment, legal services, or the like.
* * * * *
(b) Plans under section 401(a) of the Internal Revenue Code. Where
the benefit plan or trust has been approved by the Internal Revenue
Service as satisfying the requirements of section 401(a) of the
Internal Revenue Code, in the absence of evidence to the contrary, the
plan or trust will be considered to meet the conditions specified in
paragraphs (a)(1), (4), and (5) of this section.
0
14. Amend Sec. 778.217 by revising paragraphs (a) and (c) to read as
follows:
Sec. 778.217 Reimbursement for expenses.
(a) General rule. 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, section 7(e)(2) is
applicable to reimbursement for such expenses. Payments made by the
employer to cover such expenses are not included in the employee's
regular rate (if the amount of the reimbursement reasonably
approximates the expense incurred). Such payment is not compensation
for services rendered by the employees during any hours worked in the
workweek.
* * * * *
(c)(1) Payments excluding expenses. It should be noted that only
the actual or reasonably approximate amount of the expense is
excludable from the regular rate. If the amount paid as
``reimbursement'' is disproportionately large, the excess amount will
be included in the regular rate.
(2) A reimbursement amount for an employee traveling on his or her
employer's business is per se reasonable, and not disproportionately
large, if it:
(i) Is the same or less than the maximum reimbursement payment or
per diem permitted for the same type of expense under the Federal
Travel Regulation System, 41 CFR Subtitle F, or any successor
provision; and
(ii) Otherwise meets the requirements of this section.
(3) Paragraph (c)(2) of this section creates no inference that a
reimbursement for an employee traveling on his or her employer's
business exceeding the amount permitted under the Federal Travel
Regulation System is unreasonable.
* * * * *
0
15. Revise paragraph (b) of Sec. 778.218 to read as follows:
Sec. 778.218 Pay for certain idle hours.
* * * * *
(b) Limitations on exclusion. This provision of section 7(e)(2) of
the Act deals with the type of absences which are infrequent or
sporadic or unpredictable. It has no relation to regular ``absences''
such as regularly scheduled days of rest. Sundays may not be workdays
in a particular establishment, but this does not make
[[Page 11910]]
them either ``holidays'' or ``vacations,'' or days on which the
employee is absent because of the failure of the employer to provide
sufficient work. The term holiday is read in its ordinary usage to
refer to those days customarily observed in the community in
celebration of some historical or religious occasion; it does not refer
to days of rest given to employees in lieu of or as an addition to
compensation for working on other days.
* * * * *
0
16. Revise Sec. 778.219 to read as follows:
Sec. 778.219 Pay for forgoing holidays and unused leave.
(a) As explained in Sec. 778.218, certain payments made to an
employee for periods during which he performs no work because of a
holiday, vacation, or illness are not required to be included in the
regular rate because they are not regarded as compensation for working.
When an employee who is entitled to such paid leave forgoes the use of
leave and instead receives a payment that is the approximate equivalent
to the employees' normal earnings for a similar period of working time,
and is in addition to the employee's normal compensation for hours
worked, the sum allocable to the forgone leave may be excluded from the
regular rate. Such payments may be excluded whether paid out during the
pay period in which the holiday or prescheduled leave is forgone or as
a lump sum at a later point in time. Since it is not compensation for
work, pay for unused leave may not be credited toward overtime
compensation due under the Act. Three examples in which the maximum
hours standard is 40 hours may serve to illustrate this principle:
(1) An employee whose rate of pay is $12 an hour and who usually
works a 6-day, 48-hour week is entitled, under his employment contract,
to a week's paid vacation in the amount of his usual straight-time
earnings--$576. He forgoes his vacation and works 50 hours in the week
in question. He is owed $600 as his total straight-time earnings for
the week, and $576 in addition as his vacation pay. Under the statute
he is owed an additional $60 as overtime premium (additional half-time)
for the 10 hours in excess of 40. His regular rate of $12 per hour has
not been increased by virtue of the payment of $576 vacation pay, but
no part of the $576 may be offset against the statutory overtime
compensation which is due. (Nothing in this example is intended to
imply that the employee has a statutory right to $576 or any other sum
as vacation pay. This is a matter of private contract between the
parties who may agree that vacation pay will be measured by straight-
time earnings for any agreed number of hours or days, or by total
normal or expected take-home pay for the period, or that no vacation
pay at all will be paid. The example merely illustrates the proper
method of computing overtime for an employee whose employment contract
provides $576 vacation pay.)
(2) An employee who is entitled under his employment contract to 8
hours' pay at his rate of $12 an hour for the Christmas holiday,
forgoes his holiday and works 9 hours on that day. During the entire
week, he works a total of 50 hours. He is paid under his contract $600
as straight-time compensation for 50 hours plus $96 as idle holiday
pay. He is owed, under the statute, an additional $60 as overtime
premium (additional half-time) for the 10 hours in excess of 40. His
regular rate of $12 per hour has not been increased by virtue of the
holiday pay but no part of the $96 holiday pay may be credited toward
statutory overtime compensation due.
(3) An employee whose rate of pay is $12 an hour and who usually
works a 40-hour week is entitled to two weeks of paid time off per year
per his or her employer's policies. The employee takes one week of paid
time off during the year and is paid $480 pursuant to employer policy
for the one week of unused paid time off at the end of the year. The
leave payout may be excluded from the employee's regular rate of pay,
but no part of the payout may be credited toward statutory overtime
compensation due.
(b) Premiums for holiday work distinguished. The example in
paragraph (a)(2) of this section should be distinguished from a
situation in which an employee is entitled to idle holiday pay under
the employment agreement only when he is actually idle on the holiday,
and who, if he forgoes his holiday also, under his contract, forgoes
his idle holiday pay.
(1) The typical situation is one in which an employee is entitled
by contract to 8 hours' pay at his rate of $12 an hour for certain
named holidays when no work is performed. If, however, he is required
to work on such days, he does not receive his idle holiday pay. Instead
he receives a premium rate of $18 (time and one-half) for each hour
worked on the holiday. If he worked 9 hours on the holiday and a total
of 50 hours for the week, he would be owed, under his contract, $162 (9
x $18) for the holiday work and $492 for the other 41 hours worked in
the week, a total of $654. Under the statute (which does not require
premium pay for a holiday) he is owed $660 for a workweek of 50 hours
at a rate of $12 an hour. Since the holiday premium is one and one-half
times the established rate for nonholiday work, it does not increase
the regular rate because it qualifies as an overtime premium under
section 7(e)(6), and the employer may credit it toward statutory
overtime compensation due and need pay the employee only the additional
sum of $6 to meet the statutory requirements. (For a discussion of
holiday premiums see Sec. 778.203.)
(2) If all other conditions remained the same but the contract
called for the payment of $24 (double time) for each hour worked on the
holiday, the employee would receive, under his contract $216 (9 x $24)
for the holiday work in addition to $492 for the other 41 hours worked,
a total of $708. Since this holiday premium is also an overtime premium
under section 7(e)(6), it is excludable from the regular rate and the
employer may credit it toward statutory overtime compensation due.
Because the total thus paid exceeds the statutory requirements, no
additional compensation is due under the Act. In distinguishing this
situation from that in the example in paragraph (a)(2) of this section,
it should be noted that the contract provisions in the two situations
are different and result in the payment of different amounts. In the
example in paragraph (a)(2) of this section, the employee received a
total of $204 attributable to the holiday: 8 hours' idle holiday pay at
$12 an hour (8 x $12), due him whether he worked or not, and $108 pay
at the non-holiday rate for 9 hours' work on the holiday. In the
situation discussed in this paragraph, the employee received $216 pay
for working on the holiday--double time for 9 hours of work. All of the
pay in this situation is paid for and directly related to the number of
hours worked on the holiday.
0
17. Revise Sec. 778.221 to read as follows:
Sec. 778.221 ``Call-back'' pay.
(a) General. Typically, ``call-back'' or ``call-out'' payments are
made pursuant to agreement or established practice and consist of a
specified number of hours' pay at the applicable straight time or
overtime rates received by an employee on occasions when, after his
scheduled hours of work have ended and without prearrangement, he
responds to a call from his employer to perform extra work. The amount
by which the specified number of hours' pay exceeds the compensation
for hours actually worked is considered as a payment that
[[Page 11911]]
is not made for hours worked. As such, it may be excluded from the
computation of the employee's regular rate and cannot be credited
toward statutory overtime compensation due the employee. Payments that
are so regular that they are essentially prearranged, however, may not
be excluded from the regular rate. For example, if an employer retailer
called in an employee to help clean up the store for 3 hours after an
unexpected roof leak, and then again 3 weeks later for 2 hours to cover
for a coworker who left work for a family emergency, payments for those
instances would be without prearrangement and any call-back pay that
exceeded the amount the employee would receive for the hours worked
would be excludable. However, when payments under Sec. Sec. 778.221
and 778.222 are so regular that they, in effect, are prearranged, they
are compensation for work. For example, if an employer restaurant
called in an employee server for two hours of supposedly emergency help
during the busiest part of Saturday evening for 6 weeks out of 2 months
in a row, that would be essentially prearranged and all of the call-
back pay would be included in the regular rate.
(b) Application illustrated. The application of these principles to
call-back payments may be illustrated as follows: An employment
agreement provides a minimum of 3 hours' pay at time and one-half for
any employee called back to work outside his scheduled hours. The
employees covered by the agreement, who are entitled to overtime pay
after 40 hours a week, normally work 8 hours each day, Monday through
Friday, inclusive, in a workweek beginning on Monday, and are paid
overtime compensation at time and one-half for all hours worked in
excess of 8 in any day or 40 in any workweek. Assume that an employee
covered by this agreement and paid at the rate of $12 an hour works 1
hour overtime or a total of 9 hours on Monday, and works 8 hours each
on Tuesday through Friday, inclusive. After he has gone home on Friday
evening, he is called back to perform an emergency job. His hours
worked on the call total 2 hours and he receives 3 hours' pay at time
and one-half, or $54, under the call-back provision, in addition to
$480 for working his regular schedule and $18 for overtime worked on
Monday evening. In computing overtime compensation due this employee
under the Act, the 43 actual hours (not 44) are counted as working time
during the week. In addition to $516 pay at the $12 rate for all these
hours, he has received under the agreement a premium of $6 for the 1
overtime hour on Monday and of $12 for the 2 hours of overtime work on
the call, plus an extra sum of $18 paid by reason of the provision for
minimum call-back pay. For purposes of the Act, the extra premiums paid
for actual hours of overtime work on Monday and on the Friday call (a
total of $18) may be excluded as true overtime premiums in computing
his regular rate for the week and may be credited toward compensation
due under the Act, but the extra $18 received under the call-back
provision is not regarded as paid for hours worked; thus, it may be
excluded from the regular rate, but it cannot be credited toward
overtime compensation due under the Act. The regular rate of the
employee, therefore, remains $12, and he has received an overtime
premium of $6 an hour for 3 overtime hours of work. This satisfies the
requirements of section 7 of the Act. The same would be true, of
course, if in the foregoing example, the employee was called back
outside his scheduled hours for the 2-hour emergency job on another
night of the week or on Saturday or Sunday, instead of on Friday night.
0
18. Revise Sec. 778.222 to read as follows:
Sec. 778.222 Other payments similar to ``call-back'' pay.
(a) The principles discussed in 778.221 are also applied with
respect to certain types of extra payments which are similar to call-
back pay, such as:
(1) Extra payments made to employees for failure to give the
employee sufficient notice to report for work on regular days of rest
or during hours outside of his regular work schedule; and
(2) Extra payments made solely because the employee has been called
back to work before the expiration of a specified number of hours
between shifts or tours of duty, sometimes referred to as a ``rest
period.''
(b) The extra payment, over and above the employee's earnings for
the hours actually worked at his applicable rate (straight time or
overtime, as the case may be), is considered as a payment that is not
made for hours worked. Payments that are so regular that they are
essentially prearranged, however, may not be excluded from the regular
rate.
0
19. Amend Sec. 778.224 by revising paragraph (b) to read as follows:
Sec. 778.224 ``Other similar payments''.
* * * * *
(b) Examples of other excludable payments. A few examples may serve
to illustrate some of the types of payments intended to be excluded as
``other similar payments''.
(1) Sums paid to an employee for the rental of his truck or car.
(2) Loans or advances made by the employer to the employee.
(3) The cost to the employer of conveniences furnished to the
employee such as
(i) Parking spaces;
(ii) Restrooms and lockers;
(iii) On-the-job medical care;
(iv) Treatment provided on-site from specialists such as
chiropractors, massage therapists, physical therapists, personal
trainers, counselors, or Employee Assistance Programs;
(v) Gym access, gym memberships, fitness classes, and recreational
facilities;
(4) The cost to the employer of providing wellness programs, such
as health risk assessments, biometric screenings, vaccination clinics
(including annual flu vaccinations), nutrition classes, weight loss
programs, smoking cessation programs, stress reduction programs,
exercise programs, and coaching to help employees meet health goals;
and
(5) Discounts on employer-provided retail goods and services, and
tuition benefits, provided such discounts and benefits are not tied to
an employee's hours worked, services rendered, or other conditions
related to the quality or quantity of work performed (except for
fundamental conditions such as an initial waiting period for
eligibility or a repayment requirement for employee misconduct).
0
20. Revise Sec. 778.320 to read as follows:
Sec. 778.320 Hours that would not be hours worked if not paid for.
In some cases an agreement or established practice provides for
compensation for hours spent in certain types of activities which would
not be regarded as working time under the Act if no compensation were
provided. Preliminary and postliminary activities and time spent in
eating meals between working hours fall in this category. Compensation
for such hours does not convert them into hours worked unless it
appears from all the pertinent facts that the parties have treated such
time as hours worked. Except for certain activity governed by the
Portal-to-Portal Act (see paragraph (b) of this section), the agreement
or established practice of the parties will be respected, if
reasonable.
(a) Time treated as hours worked. Where the parties have reasonably
agreed to include as hours worked time
[[Page 11912]]
devoted to activities of the type described above, payments for such
hours will not have the mathematical effect of increasing or decreasing
the regular rate of an employee if the hours are compensated at the
same rate as other working hours. The requirements of section 7(a) of
the Act will be considered to be met where overtime compensation at one
and one-half times such rate is paid for the hours so compensated in
the workweek which are in excess of the statutory maximum.
(b) Time not treated as hours worked. Under the principles set
forth in Sec. 778.319, where the payments are made for time spent in
an activity which, if compensable under contract, custom, or practice,
is required to be counted as hours worked under the Act by virtue of
Section 4 of the Portal-to-Portal Act of 1947 (see parts 785 and 790 of
this chapter), no agreement by the parties to exclude such compensable
time from hours worked would be valid. On the other hand, in the case
of time spent in an activity which would not be hours worked under the
Act if not compensated and would not become hours worked under the
Portal-to-Portal Act even if made compensable by contract, custom, or
practice, such time will not be counted as hours worked unless
agreement or established practice indicates that the parties have
treated the time as hours worked. Such time includes bona fide meal
periods, see Sec. 785.19. Unless it appears from all the pertinent
facts that the parties have treated such activities as hours worked,
payments for such time will be regarded as qualifying for exclusion
from the regular rate under the provisions of section 7(e)(2), as
explained in Sec. Sec. 778.216 to 778.224. The payments for such hours
cannot, of course, qualify as overtime premiums creditable toward
overtime compensation under section 7(h) of the Act.
[FR Doc. 2019-05687 Filed 3-28-19; 8:45 am]
BILLING CODE 4510-27-P
