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In the past couple of years, the U.S. labor market has experienced employees leaving their jobs at an unprecedented rate. This so-called Great Resignation has left many employers re-evaluating their compensation and benefits packages in order to recruit and retain workers. However, employers must keep in mind how these incentives can affect their compliance with wage and hour laws—specifically how they calculate an employee’s overtime rate of pay.
The Fair Labor Standards Act (FLSA) requires that most employees in the United States be paid overtime pay for all hours worked over 40 hours in a workweek. An employee’s overtime pay is calculated at one and? a half times the employee’s “regular rate of pay.” However, determining an employee’s regular rate of pay is more complicated than just looking at the employee’s hourly rate. Under the FLSA, an employee’s regular rate of pay includes “all remuneration for employment paid to, or on behalf of, the employee.” In other words, an employee’s overtime rate of pay is 1.5 times all of things of value that an employee gives its employee for working, including hourly pay, certain bonuses and other benefits.
The general definition of what’s included in the regular rate of pay calculation is broad. However, the FLSA excludes some types of compensation from the calculation. For example, employers are not required to include holiday and vacation pay in the calculation. Gifts and discretionary special occasion/holiday bonuses are excluded. The value an employee receives through the company’s healthcare and retirement plans is also excluded. In 2019, the Department of Labor expanded the list of exemptions to exclude common workplace perks such as paid parking, gym access, employee discounts, complimentary office coffee and snacks, and more. Sign-on bonuses and other discretionary bonuses were also added to the list of exceptions.
Still, many types of workplace incentives must be included in the regular rate of pay calculation. For example, travel per diems, child or elder care credits, and other stipends must be included. Likewise, non-discretionary bonuses, such as performance bonuses, attendance bonuses and safety bonuses are considered part of the regular rate of pay. But what is included and excluded from the regular rate of pay calculation may continue to change. For example, in July 2022, lawmakers introduced the Empowering Employer Child and Elder Care Solutions Act, which would add elder and child care credits to the list of exempted benefits. This bill is currently before the House Committee on Education and Labor.
As companies continue to get creative with the benefits offered to their employees, it is important to consider what compensation employees are receiving and how this affects their regular rate of pay for overtime purposes. If in doubt, reach out to a Labor & Employment attorney to determine whether the pay rate you’re using for overtime calculations captures all compensation required by the FLSA.