Final DOL Overtime Regulations Address Impact of Various Benefits on “Regular Rate”

The DOL has issued final regulations updating and clarifying the rules governing the “regular rate” requirements under the Fair Labor Standards Act (FLSA). As background, the FLSA 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 requirements define what types of payments employers must include in the “time and a half” calculation. The final regulations are effective January 15, 2020. Here are some highlights affecting employee benefits:

• Wellness Programs. The regulations confirm that an employer’s cost for providing wellness programs is excludable from the regular rate. Listed examples 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, health coaching, financial counseling, and mental health wellness programs. The preamble notes that a wellness benefit must not be linked to an employee’s quality or quantity of work. It may be conditioned only on employee status, although reasonable eligibility waiting periods are permissible.
• HRAs and HSAs. According to the preamble, an HRA funded through a trust would satisfy the FLSA’s exclusion for irrevocable employer contributions 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 (the “bona fide plan” exclusion). But if an HRA pays reimbursements from the employer’s general assets, there are no irrevocable contributions, so the exclusion would not apply. Benefits from those HRAs (and other self-insured plans) could qualify under the exclusion for certain payments not made as compensation for hours of employment (the “other similar payments” exclusion) “if the availability and amount of benefits do not depend on hours worked, services rendered, or any other criteria that depend on the quality or quantity of an employee’s work.” Employer contributions to HSAs, by contrast, must be made to a trustee or custodian, so if an HSA program satisfies the condition requiring definitely determinable benefits or a definite formula to determine employer contributions and benefits (the “formula requirement”) for employer contributions, HSA contributions should be excludable from the regular rate.
• Cafeteria Plans. The regulations do not alter the FLSA’s handling of cafeteria plans. The preamble explains that cafeteria plans are likely to meet most of the requirements for the bona fide plan exclusion if employer contributions are determinable or based on a formula, and irrevocably made to a trust or third party (a requirement that would not, for example, be met by a self-insured health FSA). And the incidental cash payments requirement for the bona fide plan exclusion may be satisfied if no more than 20% of the employer’s contribution is paid out in cash and the cash is paid under circumstances consistent with the plan’s overall primary purpose of providing benefits. (A footnote affirms that employee salary reductions are not excludable from the regular rate as employer contributions to a bona fide plan, even though they are generally treated as employer contributions under the Code.) Regarding cash payments in lieu of plan participation, the preamble concludes that such payments are not excludable from the regular rate because they are made directly to the employee and function essentially as wage supplements.
• Retirement Plans. The regulations expand the retirement plan contributions that can be treated—absent evidence to the contrary—as satisfying most of the conditions for exclusion from the regular rate. In addition to IRS-approved tax-qualified plans subject to Code § 401(a), this presumption now applies to approved Code §§ 403(a) and (b) plans, designated retirement plans maintained pursuant to a written document that the plan sponsor reasonably believes satisfies Code requirements (including § 401(a) plans without a current determination letter), and plans that a government employer reasonably believes satisfy Code § 457(b). The presumption will now cover four of the five conditions for exclusion (up from three), but not the formula requirement.
• Accident, Unemployment, and Legal Services Benefits. The regulations clarify that plans providing benefits on account of accident, unemployment, legal services, or events that “could cause significant future financial hardship or expense” may qualify for the bona fide plans exclusion.
• Holidays, Vacation, and Sick Leave. Payments for forgoing paid sick leave have been added to the regulation that disregards payments for forgone holidays and vacations. Such payments may be excluded from the regular rate when they are the approximate equivalent of the employee’s normal earnings for a similar period of working time and are in addition to normal compensation for hours worked. Excludable payments may be paid currently or in a lump sum at a later time.
• Travel, Cell Phone, and Other Reimbursements. The regulations delete the requirement that reimbursed expenditures be incurred “solely” for the employer’s convenience to be excludable from the regular rate. The list illustrating expenses that may be reimbursed without affecting the regular rate has been expanded to include cell phone plans, organization membership dues, and credentialing exam fees. And a new provision assures that business travel expense reimbursements will be treated as reasonable if they do not exceed the maximum permitted under federal travel regulations or specified IRS guidance (see our Checkpoint article).
• Other Fringe Benefits. The following have been added as examples of excludable payments: parking benefits; treatment provided onsite by certain specialists; gym access, gym memberships, and fitness classes; discounts on employer-provided retail goods and services; tuition benefits; and adoption assistance.
• Gifts. Items given regularly throughout the year and provided with the understanding that they are gifts may be treated as excludable. Office coffee and snacks (items typically treated as de minimis fringe benefits for tax purposes) are identified as examples.

EBIA Comment: The preamble notes that overtime regulations were first issued over 60 years ago, when typical compensation consisted of traditional wages, paid time off, and contributions to basic medical, life, and disability insurance plans. Since then, employee compensation packages have expanded significantly, and the final regulations are intended to update the rules to reflect the “21st century workplace.” According to the preamble, the regulations do not impose new requirements or require affirmative measures to come into compliance, and, indeed, many of the changes are simply clarifications. However, some provisions address ambiguities on which employers may have taken different positions. As a result, employers should take this opportunity to carefully review the types of pay included in overtime calculations. For more information, see EBIA’s 401(k) Plans manual at Section V.B.4 (“Avoiding Compensation Errors”); EBIA’s Fringe Benefits manual at Sections II.E (“Employee Business Expense Reimbursements”), XXI.G (“Travel Expense Reimbursements: Substantiation”), and XXII (“Vacation/Paid Time Off (PTO) Plans”); 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.