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March 2020

Question: What do I need to know about the U.S. Department of Labor’s updated regulations on the regular rate calculation?

Answer: In mid-December, the U.S. Department of Labor issued new regulations that became effective in mid-January, clarifying how to calculate regular rate for purposes of overtime. As a general rule, employers must pay their non-exempt (hourly) employees overtime for all hours worked over 40 in a given workweek. To calculate each employee’s overtime rate, employers must multiple their regular rate by one and one-half.

The new regulations on regular rate provide that while all remuneration paid by an employer to an employee is presumed to be included in their regular rate, there are 8 specific exceptions, for items that do not need to be counted. They are:

  • Sums paid as gifts or payments in the nature of gifts made at Christmas time or on other special occasions, as long as the amounts of the gifts are not measured by or dependent on hours worked, production, or efficiency;
  • 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, reimbursement for expenses, and other similar payments which are not made as compensation for hours of employment;
  • Discretionary bonuses or payments made pursuant to a bona fide profit- sharing plan, as long as the payments are determined without regard to hours of work, production, or efficiency;
  • Contributions irrevocably made by an employer to a trustee or third person pursuant to a bona fide retirement or health insurance plan or similar benefits;
  • Extra compensation provided for working in excess of eight hours in a day or 40 hours in a week or in excess of the employee's regular work hours;
  • Extra compensation for working on Saturdays, Sundays, holidays, or other special days, as long as the premium is at least one and one-half times the regular rate;
  • Extra compensation pursuant to an employment contract or collective bargaining agreement for working outside of the hours established by the contract or collective bargaining agreement, as long as the premium is at least one and one-half times the regular rate; and
  • Income derived from certain types of stock option, stock appreciation, or bona fide stock purchase programs.

From a practical perspective, these regulations clarify that the following items are not considered compensation and therefore do not need to be part of any regular rate calculation:

  • The cost of providing certain parking benefits, wellness programs, onsite specialist treatment, gym access and fitness classes, employee discounts on retail goods and services, certain tuition benefits, and adoption assistance;
  • Payments for foregoing holidays and other forms of paid time off;
  • Show-up or reporting pay required under state and local laws (for example,the requirement under New York law to pay four hours at minimum wage if an employee reports to work at the request of the employer);
  • Reimbursed expenses, even if not incurred solely for the employer's benefit, such as cell phone plans, credentialing exam fees, and organization membership dues;
  • Certain types of signing bonuses and longevity bonuses;
  • The cost of office coffee and snacks provided to employees as gifts; and
  • Contributions to benefit plans for accident, unemployment, legal services, or other events that could cause future financial hardship or expense.

Determining what compensation must be included in regular rate is critical because failure to include all required compensation in the calculation can lead to underpayment of overtime and, as a result, significant penalties, interest and attorneys’ fees in the event of a lawsuit. Systemic mistakes can also lead to class- action litigation and with even higher damages and penalties.

Employers should pay close attention to these new regulations and ensure they, and their payroll processors, are including all necessary compensation in their regular rate calculations.

The information contained in this column is not intended to be a substitute for professional counseling or advice.

Paul Buehler counsels and represents employers in a variety of labor and employment related contexts and is an Associate at the Albany office of Bond, Schoeneck & King, PLLC.

If you have a question you would like to submit, you are encouraged to do so by email (This email address is being protected from spambots. You need JavaScript enabled to view it.) or telephone (518-533-3216).