Labor Department Issues Final Rule on Calculating 'Regular Rate' of Pay
The New Year is bringing changes to the current "regular rate" of pay definition. Recently, the U.S. Department of Labor updated the FLSA definition of the regular rate of pay. The final ruling will take effect on January 15, 2020, and will provide modernized regulations for employers. Read this blog to learn more.
Employers now have more clarity and flexibility about which perks they can include in workers' "regular rate" of pay, which is used to calculate overtime premiums under the Fair Labor Standards Act (FLSA). The U.S. Department of Labor (DOL) announced a final rule that will take effect Jan. 15, 2020.
This is the first time in more than 50 years that the DOL has updated the FLSA definition of the regular rate of pay. Here's how the new law will impact employers.
Reduced Litigation Risk
Currently, the regular rate includes hourly wages and salaries for nonexempt workers, most bonuses, shift differentials, on-call pay and commissions. It excludes health insurance, paid leave, holiday and other discretionary bonuses, and certain gifts.
Many employers weren't sure, however, if certain perks had to be included in the regular rate of pay. So instead of risking costly lawsuits, some employers were choosing not to offer competitive benefits.
Employers were concerned that, for example, if they offered gym memberships to employees, they would have to add the cost to the regular-rate calculation, explained Kathleen Caminiti, an attorney with Fisher Phillips in Murray Hill, N.J., and New York City. The new rule says that gym membership fees and other similar benefits don't have to be included.
The new rule is intended to reduce the risk of litigation and enable employers to provide benefits without fearing that "no good deed goes unpunished," Caminiti said.
The final rule largely tracks the proposed rule, noted Susan Harthill, an attorney with Morgan Lewis in Washington, D.C. But it includes more clarifying examples and provides additional insight into the DOL's views on specific benefits, she said.
This rule was relatively uncontroversial, said Tammy McCutchen, an attorney with Littler in Washington, D.C. She noted that only a few employee and union groups commented against the rule, and those comments addressed very specific points.
"Employees like these benefits, too," she said.
Clarifications
The rule clarifies that employers may exclude the following perks from the regular-rate calculation:
- Parking benefits, wellness programs, onsite specialist treatments, gym access and fitness classes, employee discounts on retail goods and services, certain tuition benefits, and adoption assistance.
- Unused paid leave, including paid sick leave and paid time off.
- Certain penalties employers must pay under state and local scheduling laws.
- Business expense reimbursement for items such as cellphone plans, credentialing exam fees, organization membership dues and travel expenses that don't exceed the maximum travel reimbursement under the Federal Travel Regulation system or the optional IRS substantiation amounts for certain travel expenses.
- Certain sign-on and longevity bonuses.
- Complimentary office coffee and snacks.
- Discretionary bonuses (the DOL noted that the label given to a bonus doesn't determine whether it is discretionary).
- Contributions to benefit plans for accidents, unemployment, legal services and other events that could cause a financial hardship or expense in the future.
"Unlike the upcoming changes to the FLSA white-collar regulations, which will have the force of law, this final rule is predominately interpretative in nature," said Joshua Nadreau, an attorney with Fisher Phillips in Boston. "Nevertheless, you should review these changes carefully to determine whether any of the clarifications are applicable to your workforce."
Employers who follow the rule can show that they made a good-faith effort to comply with the FLSA.
Paying Overtime Premiums
Under the FLSA, nonexempt employees generally must be paid 1.5 times their regular rate of pay for all hours worked beyond 40 in a week. But the regular rate includes more than just an employee's base hourly wage. Employers must consider "all remuneration for employment paid to, or on behalf of, the employee," except for specific categories that are excluded from the calculation, such as:
- Discretionary bonuses.
- Payments made when no work is performed, such as vacation or holiday pay.
- Gifts.
- Irrevocable benefits payments.
- Payments for traveling expenses.
- Premium payments for work performed outside an employee's regular work hours.
- Extra compensation paid according to a private agreement or collective bargaining.
- Income derived from grants or options.
The final rule updated and modernized the items that can be excluded from the calculation, Caminiti said. For example, the prior regulation referenced only holiday and vacation time, whereas the new rule recognizes that many employers lump together paid time off. The rule clarifies that all paid time off will be treated consistently as to whether it should be included in the regular rate.
The DOL eliminated some restrictions on "call-back" and similar payments but maintained that they can't be excluded from an employee's regular rate if they are prearranged.
The rule also addresses meal breaks, scheduling penalties, massage therapy and wellness programs.
"Some of these benefits didn't exist even a decade ago," McCutchen noted.
Harthill observed that the line between discretionary and nondiscretionary bonuses has created uncertainty and litigation. So the final rule's text and preamble give more examples and explanations about certain bonuses in response to commenters' requests. For example, the final rule provides more clarity about sign-on and longevity bonuses, but the DOL declined to specifically address other types of bonuses commenters asked about.
Action Items
"Now is the time for a regular-rate audit," McCutchen said. Compensation specialists should gather a list of all the earnings codes they're currently using for nonexempt employees, note each one they are including in the regular rate and compare that with the new rule to see if changes need to be made.
Most employers presently are not including paid sick time, tuition reimbursement and other perks in the regular-rate calculation, McCutchen noted, and DOL has confirmed the practice.
Now is also a good time for employers to decide if they want to start providing certain perks that are popular with employees, she said.
Harthill noted that it is important for employers to check whether the relevant state law tracks or departs from the federal law, because state laws might have stricter rules about overtime calculations.
SOURCE: Nagele-Piazza, L. (12 December 2019) "Labor Department Issues Final Rule on Calculating 'Regular Rate' of Pay" (Web Blog Post). Retrieved from https://www.shrm.org/ResourcesAndTools/legal-and-compliance/employment-law/Pages/Labor-Department-Issues-Final-Rule-on-Calculating-Regular-Rate-of-Pay-.aspx
DOL proposes $35K overtime threshold
Recently, the Department of Labor proposed an increase in the salary threshold for overtime eligibility. The current overtime threshold is set at $23, 660. Continue reading this blog post to learn more about this proposed change.
The Labor Department proposed to increase the salary threshold for overtime eligibility to $35,308 a year, the agency announced late Thursday.
If finalized, the rule’s threshold — up from the current $23,660 — would expand overtime eligibility to more than a million additional U.S. workers, far fewer than an Obama administration rule that was struck down by a federal judge in 2017.
Unless exempt, employees covered by the Fair Labor Standards Act must receive at least time and one-half their regular pay rate for all hours worked over 40 in a workweek.
The proposal doesn’t establish automatic, periodic increases of the salary threshold as the Obama proposal had. Instead, the department is asking the public to weigh in on whether and how the Labor Department might update overtime requirements every four years.
The department’s long-awaited proposal comes after months of speculation from employers and will likely be a target of legal challenges from business groups concerned about rising administrative challenges of the rule. The majority of business groups were critical of Obama’s overtime rule, citing the burdens it placed particularly on small businesses that would be forced to roll out new systems for tracking hours, recordkeeping and reporting.
Labor Secretary Alexander Acosta said in a statement that the new proposal would “bring common sense, consistency, and higher wages to working Americans.”
Under the Obama administration, the Labor Department in 2016 doubled the salary threshold to roughly $47,000, extending mandatory overtime pay to nearly 4 million U.S. employees. But the following year, a federal judge in Texas ruled that the ceiling was set so high that it could sweep in some management workers who are supposed to be exempt from overtime pay protections. Business groups and 21 Republican-led states then sued, challenging the rule.
The Department said it is asking for public comment for periodic review to update the salary threshold.
SOURCE: Mayer, K. (7 March 2019) "DOL proposes $35K overtime threshold" (Web Blog Post). Retrieved from https://www.employeebenefitadviser.com/news/dol-proposes-35k-overtime-threshold?brief=00000152-1443-d1cc-a5fa-7cfba3c60000
DOJ to appeal overtime ruling
Great article from BenefitsPro by Jack Craver
The Obama administration is not giving up on its overtime rule just yet.
The Department of Justice is appealing an injunction placed on the rule by a federal judge, which prevented the rule from going into effect on Dec. 1, as planned. The injunction came in response to a suit challenging the rule by 21 states, led by Texas and Nevada.
"That injunction was granted to some large businesses and Republican governors who had colluded to try to disrupt the implementation of this rule,” says White House spokesman Josh Earnest, according to NPR. “And essentially continue to take advantage of more than 4 million of the hardest-working Americans."
Judge Amos Mazzant of the U.S District Court for the Eastern District of Texas ordered an injunction after deciding that the challenge to the rule was likely to succeed in a trial.
The Department of Labor exceeded its authority by raising the salary threshold for a worker to be exempt from mandatory overtime pay from $23,660 to $47,476, Mazzant writes.
The ruling suggested that federal overtime law only allows the agency to determine overtime eligibility based on job duties, not salary, Mazzant writes. The ruling thus casts into doubt the existing salary threshold as well.
If the legal battle drags on, it is unlikely that the incoming Trump administration will continue fighting on behalf of the rule in court. In the one instance in which the president-elect commented on the issue during the campaign, he said that he would like to see an exemption from the rule for small businesses.
If Trump did reverse course on the issue, it would be a great disappointment to the Republican attorneys general who brought the suit. In a statement following the announcement of the injunction, Texas Attorney General Ken Paxton, who led the suit, said that the new rule “hurts American workers."
Congressional Republicans also denounced the rule when the Obama administration announced the final version in May. House Speaker Paul Ryan called it “an absolute disaster.”
See the original article Here.
Source:
Craver J.(2016 December 2). DOJ to appeal overtime ruling[Web blog post]. Retrieved from address https://www.benefitspro.com/2016/12/02/doj-to-appeal-overtime-ruling
DOL Overtime Rule Will Impact Hospitality Industry
Originally Posted by SHRM.org
By: Allen Smith
The hospitality industry will be hit hard by the Department of Labor’s updates to the overtime rule implementing the Fair Labor Standards Act (FLSA), experts say. With high overhead costs and a low-profit margin, hotels and restaurants typically don’t have enough money in reserve to give employees big raises to preserve their exempt status or to pay many hours of overtime if employees are eligible.
As a result, hospitality employers will need to explore alternative compensation models, schedules and staffing options to try to mitigate costs, according to Ryan Glasgow, an attorney with Hunton & Williams in Richmond, Va.
Some choices will be simple, he noted. For employees with relatively high salaries who work long hours, the logical choice is to increase their salaries, as the minimum increase in salary likely will be less than the employer would have to pay in substantial overtime hours. As for employees with low salaries who don’t work much overtime, it makes sense to convert them to nonexempt and pay overtime for the few overtime hours they might work.
“For all other employees, the decision will be much more difficult and will require a lot of strategic planning and analysis,” Glasgow said. “For example, in certain circumstances, it may be feasible for the employer to combine two exempt positions into one position so that the cost of increasing the salary for the remaining one employee is offset by the cost-savings from the elimination of the other employee’s position.”
He added that it may be better for the employer to convert a position to nonexempt and hire more employees to perform the work so that none of the employees work overtime. “Similarly, employers should evaluate each impacted position to determine whether there are unnecessary and/or inefficient tasks that can be eliminated or given to another employee so that the position requires fewer hours of work, thus lowering the impact of paying overtime,” he noted.
Domino Effect
Be aware of the potential domino effect when an employee’s salary is increased above the new salary level. The employee and the employee’s supervisor may suddenly be making similar salaries. Supervisors may ask for an increase as well, leading to salary increases up the organizational chart, Glasgow said.
Bonus and commission plans will have to be re-evaluated since there may be overtime pay consequences if employees who have been converted to nonexempt are paid bonuses or commissions, noted Robert Boonin, an attorney with Dykema in Detroit and Ann Arbor, Mich., and immediate past chair of the Wage and Hour Defense Institute, a network of wage and hour lawyers.
Rule’s Potential Winners
Salaried workers earning less than $913 a week or $47,476 annually and who regularly work more than 40 hours per week stand to gain from the overtime rule, said Wendy Stryker, an attorney with Frankfurt Kurnit Klein & Selz in New York City. These workers will have their salaries raised above the new threshold, be paid overtime or have their hours reduced to a 40-hour workweek, she said. These employees include entry and midlevel professionals, such as chefs, sommeliers, and hotel or restaurant managers and assistant managers, she added.
The hospitality industry has a lot of employees earning in this range, according to Stryker. She noted that the average U.S. wage for chefs, head cooks and pastry chefs is $45,920. For bakers, the average U.S. wage is lower, at $26,270, Stryker noted.
While workers may benefit from the overtime rule, Michael Layman, vice president, regulatory affairs for the International Franchise Association in Washington, D.C., said the overtime rule will hit the hospitality industry particularly hard. Its employers “disproportionately face unpredictable season- or weather-dependent schedules and variable labor demands, which makes tracking hours and managing overtime costs a significant challenge,” he said.
“Given the need for onsite guest services, employers in the hospitality industry may have less flexibility than other employers to automate or offshore operations,” said Nancy Vary, director of the compliance consulting center at Xerox HR Services in New York City.
However, Carolyn Richmond, an attorney with Fox Rothschild in New York City, said, “I think we will see the live reservationist all but disappear as reliance on [online booking apps] OpenTable, Resy and the others grows.” She added, “Owners are looking at more and more automation—programs that monitor and control labor costs and even how to replace certain employees.”
Other Significantly Affected Industries
Hospitality isn’t the only industry to feel the brunt of the new overtime rule.
“The construction and retail industries will be impacted significantly because, like the hospitality industry, they have unusually high concentrations of low-salaried managers,” Glasgow said. He also expected large research and educational hospitals to be uniquely impacted because they have many low-salaried professionals.
“Any industry that has traditionally offered low pay to its skilled workers is likely to be hard-hit by the new overtime rules,” Stryker said. “In New York City, this is likely to be the creative industries such as advertising and film/television production, where hours are traditionally long, and the work product cannot necessarily be created on a 40-hour-per-week schedule.”
The point of the rule isn’t to benefit employers, though. “The new overtime rules were created to benefit employees,” Stryker said. “As the president noted when he directed the Department of Labor to update the relevant regulations, the FLSA’s overtime protections “are a linchpin of the middle class, and the failure to keep the salary level requirement for the white-collar exemption up to date has left millions of low-paid salaried workers without this basic protection.”
That said, Richmond noted that “While the Department of Labor hopes and expects these changes will lead to increased wages through overtime, I don’t expect that to be the case in [the hospitality] industry. Payroll has already risen dramatically with minimum wage increases and resulting wage compression, and owners will spend more time looking at controlling overtime.”
Allen Smith, J.D., is the manager of workplace law content for SHRM. Follow him @SHRMlegaleditor.
- See more at: https://shrm.org/legalissues/federalresources/pages/hospitality-industry-weighs-options-in-wake-of-overtime-rule.aspx#sthash.D3BGAwvR.dpuf
Final Rule Released: Fair Labor Standards Act, Overtime Regulation
From the Society for Human Resources.
Today, the Department of Labor (DOL) released its final regulations making changes to Part 541 governing overtime exemptions under the Fair Labor Standards Act (FLSA). As you know, SHRM leads the employer coalition, the Partnership to Protect Workplace Opportunity, on the rule and SHRM members have shared their views on numerous occasions with Congress and the Administration through testimony, listening sessions, comments on the regulation, and thousands of letters to policymakers.
While SHRM appreciates the Administration’s attention to some of the concerns relayed by SHRM members, we are disappointed that the final rule includes a significant increase to the salary threshold and automatic increases in the future. These will present considerable challenges to employees and employers. This is why SHRM-supported legislation to block the rule, pending a full economic analysis of the changes to overtime regulations, is still needed. This legislation also contains critical provisions preventing the rule from including automatic updates to the salary threshold.
SHRM is reviewing the final rule and will provide information and resources over the next few days to help you understand the changes and prepare to implement the rule in your workplace.
In the meantime, here are the key elements of the new regulation that you need to know now:
1. Salary Threshold Changed to $913/week ($47,476 per Year)
This threshold doubles the current salary threshold level. While this level is slightly lower than the threshold in the proposed rule, it still encompasses many employees that are currently classified as exempt. SHRM was disappointed that DOL did not offer a more reasonable increase and set the threshold, as it has in the past, at a level designed to encompass those employees that are clearly not engaged in exempt-type work.
2. Automatic Salary Threshold Increases Every 3 Years (Not Annually) to Maintain Level at 40th Percentile in Lowest-Wage Census Region
DOL reduced the frequency of the automatic increases in response to concerns raised by SHRM and others. Instead of annual increases, the threshold will be adjusted every 3 years to maintain the level at the 40th percentile of full-time salaried workers in the lowest-wage Census region. Automatically updating the salary threshold, however, does not allow the government to take into account changing economic conditions, specific impact on certain industries, or regional differences. It also denies the public the ability to have input on the threshold as required by the regulatory process.
3. Duties Test is Unchanged
The absence of a duties test change is a significant win for the thousands of SHRM members who expressed concern in this area. DOL did not make changes to the standard duties test.
4. Effective Date is December 1, 2016.
SHRM advocated for a longer implementation period than the standard 60 days and the final rule provides additional time for employers to prepare. With the rule going into effect on December 1, 2016, HR professionals should review their current workforce immediately to determine which employees are affected, whether to re-classify those employees, and execute a communications strategy. HR should keep in mind the periodic adjustments and set a regular review process.
5. Highly Compensated Employee (HCE) Exemption Is Now $134,004 Per Year
The final rule retains the methodology in the proposed rule setting the threshold at the 90th percentile of full-time salaried workers nationally.
6. Stay Tuned for SHRM Member Resources…
• SHRM Webcast – Understanding DOL's New Overtime Rule. Register Now for the Thursday, May 19, 2 p.m. ET webcast!
• SHRM Special Report for HR – coming soon! Look for an upcoming SHRM summary of the final rule with tips on compliance. Visit SHRM’s Overtime Resource Page for additional resources.
• SHRM’s 2016 Annual Conference -- From the final FLSA overtime regulations to health care to performance management to the latest innovations in HR, you’ll get the practical tools and resources you need to solve your toughest HR challenges.
7. Advocacy in Congress is Even More Important
While the final rule contains some limited improvements, it is critical for Congress to pass the Protecting Workplace Advancement and Opportunity Act (S. 2707 and H.R. 4773), which would nullify this rule and require DOL to perform an economic analysis of how changes to overtime regulations will impact nonprofits, small businesses, and employers in other vulnerable industry sectors before issuing a new rule. Visit SHRM’s call to action to quickly and easily send an email to your members of Congress to ask that they cosponsor this important workplace legislation.
NEXT STEPS: As referenced above, Congress will continue to try to nullify the rule through legislation requiring DOL to conduct a robust economic analysis, by refusing to fund the rule’s enforcement, and other means. Given the breadth of the rule, SHRM is considering all policy options.
SHRM has taken a leading role in educating the Administration and Congress on the rule’s impact on the workplace. As a member, you can trust that SHRM will keep you up-to-date on every critical detail of the regulations. We’ll also be here to answer your specific questions as you begin to implement these changes over the coming weeks – this is just one way your SHRM membership works for you.
DOL Narrows Independent Contractor Classification
Originally posted by Allen Smith on July 16, 2015 on shrm.org.
More workers may be entitled to overtime due to July 15, 2015, Department of Labor (DOL) guidance that defines “independent contractor” narrowly enough for many previously classified as independent contractors to now be properly classified as employees.
This narrowing of the definition of independent contractor is due partly to the DOL deemphasizing the degree to which a business controls an individual’s work, and focusing instead on the economic realities test, which looks at whether the worker is economically dependent on the employer or in business for him or herself.
“This is part and parcel of the Obama administration’s push to give America a raise,” said Allan Bloom, an attorney with Proskauer in New York City, who added, “There certainly have been companies that have misclassified workers.”
He remarked that the latest guidance is important because “the DOL significantly downplays the ‘control test,’ which has long been the guide many businesses consider when determining whether or not a worker is truly an ‘employee’.” Bloom recommended that, “Businesses worried about staying under the DOL radar on this issue should make sure that they are doing business with established independent service providers if they intend to pay on a 1099 basis.”
Matthew Disbrow, an attorney with Honigman in Detroit, said, “The subjective nature of the DOL’s interpretation, and its narrow focus on ‘economic dependence,’ creates substantial challenges for companies who wish to maintain their independent-contractor relationships. Furthermore, although the elements of the ‘economic realities’ test may appear understandable at first blush, a careful reading of the DOL’s guidance reveals that there are no bright-line rules upon which to rely. The same person could be considered an independent contractor or an employee simply based on the business at issue.”
He added that the administrator’s interpretation [AI] “arguably restricts the use of independent contractors to very few specific situations.” Disbrow explained, “Because no factor is determinative, and the AI rejects any ‘mechanical’ application of the test, inside counsel or other executives will not always know what factor the DOL or a reviewing court might find most important. Such ‘fuzzy’ multifactored tests usually create more problems than they solve."
Six Factors
In conducting an economic realities test, an employer should look to six factors, the DOL noted:
- The extent to which the work performed is an integral part of the employer’s business.
- The worker’s opportunity for profit or loss depending on his or managerial skill.
- The extent of the relative investments of the employer and the worker.
- Whether the work performed requires special skills and initiative.
- The permanency of the relationship.
- The degree of control exercised or retained by the employer.
“In undertaking this analysis, each factor is examined and analyzed in relation to one another, and no single factor is determinative,” the DOL noted. “The ‘control’ factor, for example, should not be given undue weight.”
“The factors should not be applied as a checklist, but rather the outcome must be determined by a qualitative rather than a quantitative analysis,” the DOL stated.
“The subjective nature of such a test is a slippery slope and provides no practical, objective criteria on which businesses can rely,” Disbrow said.
Under the department’s analysis of the six factors, positions frequently considered as independent contractors—such as carpenters, construction workers, cable installers and electricians—aren’t necessarily independent contractors if they don’t satisfy the factors.
Suppose, the department hypothesized, a highly skilled carpenter provides carpentry services for a construction firm. But the carpenter does not exercise his skills in an independent manner. He does not determine the sequence of work, order additional materials or think about bidding for the next job, but instead is told what work to perform where. “In this scenario, the carpenter, although highly skilled technically, is not demonstrating the skill and initiative of an independent contractor (such as managerial and business skills),” the DOL emphasized. “He is simply providing his skilled labor.”
By contrast, “a highly skilled carpenter who provides a specialized service for a variety of area construction companies (for example, custom, handcrafted cabinets that are made to order) may be demonstrating the skill and initiative of an independent contractor if the carpenter markets his services, determines when to order materials and the quantity of materials to order, and determines which orders to fill,” the DOL stated.
Monitor Classifications
“While the human resources function clearly ‘owns’ employee issues in corporate America, many companies do not monitor their independent contractor relationships,” said Michael Droke, an attorney with Dorsey and Whitney in Palo Alto, Calif., and Seattle.
“Companies should make clear which department within the organization is responsible to understand the law, know which contractors have been engaged and monitor compliance. Often, the human resources or finance department is put in charge,” he noted.
“Employers should maintain basic records on the independent contractor determination process, and the facts used to make that determination. For example, they should keep records of business licenses, business cards, contractor tax records, project work plans showing limited engagements and correspondence from the contractor,” according to Droke.
For Disbrow, some main takeaways from the guidance are:
- The DOL believes most work should be performed by employees. So, independent contractors should be used sparingly.
- Entering into independent contractor agreements or hiring a business entity (rather than a person) does not necessarily protect you from liability under the Fair Labor Standards Act.
- A careful review of the type and scope of work being performed should be completed before engaging the services of any nonemployee.
- When entering into agreements with other service providers, ensure that you obtain appropriate indemnification provisions to protect the company from the wage and hour claims of the service provider’s workers.
“Companies should avoid giving contractors rights or access that cut against contractor determination. For example, contractors should not have internal e-mail accounts, should not be given server access and should not be invited to employee functions,” Droke observed. “The DOL guidance reminds employers to periodically audit existing contractors to make sure they have not inadvertently slipped from contractors to employees. If an otherwise-valid contractor arrangement becomes economically dependent on the work, then the relationship may convert to an employee entitled to overtime.”
This guidance is Administrator’s Interpretation No. 2015-1.