DOL Letters Consider Overtime Impact of Longevity Awards, Referral Bonuses, and Life Insurance

The DOL’s Wage and Hour Division (WHD) has issued three letters considering whether particular fringe benefits must be included in an employee’s “regular rate” when calculating overtime pay under the Fair Labor Standards Act (FLSA). Under the FLSA, a covered employer generally must pay its nonexempt employees the equivalent of 1-1/2 times their “regular rate” for hours the employees work in excess of 40 hours in a workweek. Generally, the regular rate includes “all remuneration for employment paid to, or on behalf of, the employee,” but the FLSA excludes several types of compensation from that definition. The letters issued by the WHD consider whether longevity awards, referral bonuses, and taxable group-term life insurance benefits must be included in the regular rate.

• Longevity Awards (FLSA2020-3). A city paid its employees “longevity awards” in the amount of $2 per month for each whole year of service. The city proposed to pay those awards in an annual lump sum at Christmas, and asked whether those payments could be excluded from each employee’s regular rate. The WHD’s letter explains that DOL regulations permit the exclusion of a bonus paid at Christmas or on another special occasion if that bonus is a gift or in the nature of a gift, and the amounts given are not measured by, or directly dependent on, hours worked, production, or efficiency. According to the letter, the longevity awards would not qualify as gifts because they were required under a city resolution. If the resolution had simply permitted city officials to make the payments, and city officials had discretion to deny the full amount to any eligible employee, then the amounts could be excluded from the regular rate as gifts, even if the awards were made with such regularity that employees came to expect them.
• Referral Bonuses (FLSA2020-4). In this letter, the WHD considers a proposal to pay referral bonuses in two installments. The first installment would be paid after a referred candidate was hired. The second installment would be paid one year later, but only if the referring and the referred employee were still actively employed. The letter concludes that the first installment would be excludable because it would be paid only to employees outside of Human Resources whose jobs did not require recruitment and who did not spend significant work time recruiting. The second installment, however, had to be analyzed as a longevity award because it would be contingent on the referring employee’s completing a year of service. (The WHD notes that a shorter period might have changed the result.) While the second installment would not be dependent on the referring employees’ “hours worked, production or efficiency,” it would have to be included in the regular rate if an employee had a legally enforceable right to receive it. Conversely, if there were no contractual right, the second installment might be excludable as a gift.
• Taxable Group-Term Life Insurance (FLSA2020-5). In this letter, the WHD explains that imputed income resulting from employer-provided group-term life insurance coverage in excess of $50,000 need not be included in an employee’s regular rate if the FLSA’s exception for “bona fide” benefit plan contributions applies. The letter emphasizes that applicability of the exception to employer-provided life insurance does not depend on whether the employee’s coverage is taxable under the Code. Under the exception, insurance policy benefits must be “specified or definitely determinable on an actuarial basis,” or there must be a “definite formula” for determining both the employer’s contributions and the benefits. The letter offered no opinion as to whether those requirements were satisfied.

EBIA Comment: The FLSA includes eight statutory exclusions to its broad definition of the regular rate used for calculating overtime. Detailed regulations on those exclusions were updated in December 2019 to better reflect current compensation and benefit practices (see our Checkpoint article). These letters remind us that there is no one-size-fits-all answer to the question of whether a fringe benefit must be included in the regular rate. Rather, every benefit must be independently assessed against the relevant criteria in the statute and regulations. For more information, see, for example, EBIA’s Fringe Benefits manual at Sections IX.J.3 (“Discounts: Fair Labor Standards Act (FLSA)”); X.I.3 (“Qualified Educational Assistance Programs: Federal Employment Laws”); and XXII.G.3 (“Vacation/Paid Time Off (PTO) Plans: Federal Employment Laws”). See also EBIA’s Cafeteria Plans manual at Section XVII.D (“Overtime Pay Issues Under the FLSA”) and EBIA’s Consumer-Driven Health Care manual at Sections VI.I.3 (“Does the FLSA Apply to Wellness and Disease-Management Programs?”) and XXV.H.2 (“Overtime Pay Issues Under the FLSA”).

Contributing Editors: EBIA Staff.