Regular Rate Under the Fair Labor Standards Act

Federal RegisterDec 16, 2019

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DEPARTMENT OF LABOR

Wage and Hour Division

29 CFR Parts 548 and 778

RIN 1235-AA24

Regular Rate Under the Fair Labor Standards Act

AGENCY:

Wage and Hour Division, Department of Labor.

ACTION:

Final rule.

SUMMARY:

The Fair Labor Standards Act (FLSA or Act) 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 includes all remuneration for employment, subject to the exclusions outlined in section 7(e) of the FLSA. In this final rule, the Department of Labor (Department) updates a number of regulations on the calculation of overtime compensation both to provide clarity and to better reflect the 21st-century workplace. These changes will promote compliance with the FLSA, provide appropriate and updated guidance in an area of evolving law and practice, and encourage employers to provide additional and innovative benefits to workers without fear of costly litigation.

DATES:

This final rule is effective on January 15, 2020.

FOR FURTHER INFORMATION CONTACT:

Amy DeBisschop, Division of Regulations, Legislation, and Interpretation, Wage and Hour Division, U.S. Department of Labor, Room S-3502, 200 Constitution Avenue NW, Washington, DC 20210; telephone: (202) 693-0406 (this is not a toll-free number). Copies of this final rule may be obtained in alternative formats (Large Print, Braille, Audio Tape or Disc), upon request, by calling (202) 693-0675 (this is not a toll-free number). TTY/TDD callers may dial toll-free 1-877-889-5627 to obtain information or request materials in alternative formats.

Questions of interpretation and/or enforcement of the agency's regulations may be directed to the nearest WHD district office. Locate the nearest office by calling WHD's toll-free help line at (866) 4US-WAGE ((866) 487-9243) between 8 a.m. and 5 p.m. in your local time zone, or visit WHD's website for a nationwide listing of WHD district and area offices at

http://www.dol.gov/whd/america2.htm.

SUPPLEMENTARY INFORMATION:

I. Executive Summary

The FLSA generally requires covered employers to pay nonexempt employees overtime pay of at least one and one-half times their regular rate for hours worked in excess of 40 per workweek. The FLSA defines the regular rate as “all remuneration for employment paid to, or on behalf of, the employee”—subject to eight exclusions established in section 7(e).

Part 778 of CFR title 29 contains the regulations addressing the calculation of the regular rate of pay for overtime compensation under section 7 of the FLSA.

See

29 U.S.C. 207(e).

The Department promulgated the majority of part 778 of CFR title 29 more than 60 years ago, when typical compensation often consisted predominantly of traditional wages, paid time off for holidays and vacations, and contributions to basic medical, life insurance, and disability benefits plans.

Since that time, the workplace and the law have evolved, but the Department has only made minor updates to part 778 since 1950.

See

U.S. Bureau of Labor Statistics,

An Overview of Employee Benefits,

Occupational Outlook Quarterly (U.S. Bureau of Labor Statistics), Summer 2005, at 20,

available at https://www.bls.gov/careeroutlook/2005/summer/art02.pdf.

See, e.g.,

33 FR 986 (Jan. 26, 1968) (codified at 29 CFR 778.0 through 778.603); 36 FR 4699 (Mar. 11, 1971) (updating 29 CFR 778.214 to clarify that advance approval by the Department is not required for plans providing benefits within the meaning of 29 U.S.C. 207(e)(4)); 36 FR 4981 (Mar. 16, 1971) (updating 29 CFR 778.117 to clarify commission payments that must be included in the regular rate); 46 FR 7308 (Jan. 23, 1981) (updating 29 CFR part 778 to increase the dollar amounts used as examples in the regulations, to respond to statutory amendments affecting other parts of the FLSA, and to modify § 778.320 to clarify that pay for nonworking time does not automatically convert such time into hours worked); 46 FR 33515-2 (June 30, 1981) (correcting errors in the January 1981 update in 29 CFR 778.323, 778.327, 778.501, 778.601); 56 FR 61100 (Nov. 29, 1991) (updating 29 CFR 778.603 to address statutory amendment adding section 7(q) regarding maximum-hour exemption for employees receiving remedial education); 76 FR 18832 (Apr. 5, 2011) (updating §§ 778.110, 778.111, 778.113, and 778.114 to reflect statutory changes to the minimum wage; updating § 778.200 to reflect amendments made by the Worker Economic Opportunity Act; updating § 778.208 from “seven” to “eight” types of remuneration excluded when computing the regular rate).

First, employee compensation packages, including employer-provided benefits and “perks,” have expanded significantly. The Bureau of Labor Statistics (BLS) estimated that fringe benefits comprised only 5 percent of employees' total compensation in 1950.

Today, such benefits make up approximately one-third of total compensation.

Many employers, moreover, now offer various wellness benefits or perks, such as fitness classes, nutrition classes, weight loss programs, smoking cessation programs, health risk assessments, vaccination clinics, stress reduction programs, and training or coaching to help employees meet their health goals.

Yung-Ping Chen, The Growth of Fringe Benefits Implications for Social Security, Monthly Labor Review Vol. 104 No. 11, November 1981,

https://www.bls.gov/opub/mlr/1981/11/art1full.pdf

(“cash payroll as a percentage of total compensation declined steadily over the last 30 years, falling from 95 percent in 1950, to 92.2 percent in 1960, 89.7 percent in 1970, and 84.2 percent in 1980”).

Bureau of Labor Statistics News Release, Employer Cost for Employee Compensation—March 2019, June 18, 2019, (“Wages and salaries cost employers $25.22 [per hour] while benefit costs were $11.55.”),

https://www.bls.gov/news.release/pdf/ecec.pdf.

Both law and practice concerning more traditional benefits, such as sick leave, have likewise evolved in the decades since the Department first promulgated part 778. For example, instead of providing separate paid time off for illness and vacation, many employers now combine these and other types of leave into paid time off plans. Moreover, in recent years, a number of state and local governments have passed laws requiring employers to provide paid sick leave. In 2011, for example, Connecticut became the first state to require private-sector employers to provide paid sick leave to their employees.

Today, several states, the District of Columbia,

and various cities and counties

require paid sick leave, and many other states are considering similar requirements.

See

2011 Conn. Legis. Serv. P.A. 11-52 (West).

See

Ariz. Rev. Stat. secs. 23-364, 23-371

et seq.;

Cal. Lab. Code secs. 245, 2810.5; 2011 Conn. Legis. Serv. P.A. 11-52 (West); D.C. Code sec. 32-131.01

et seq.;

Me. Rev. Stat. Ann. tit. 26, sec. 636 (2019) (effective Jan. 1, 2021); Md. Code Ann., Lab. & Empl. section 3-1301

et seq.

(West 2019); Mass. Gen. Laws ch. 149, sec. 148C, 148D; Mich. Comp. Laws secs. 408.961-974; 2019 Nev. Legis. Serv. 592 (West) (to be codified at Nev. Rev. Stat. Ch. 608 (2019) (effective Jan. 1, 2020); N.J. Stat. Ann. sec. 34:11D-1

et seq.;

Or. Rev. Stat. sec. 653.601

et seq.;

28 R.I. Gen. Laws sec. 28-57-1

et seq.;

21 Vt. Stat. secs. 384, 481-485, 345; Wash. Rev. Code secs. 49.46.005, 49.46.020, 49.46.090, 49.46.100.

See, e.g.,

Austin, Tex., City Code ch. 4-19 (2018); Chi., Ill., Code ch. 1-24 (2017); Minneapolis, Minn., Admin. Code title 2, sec. 40.10

et seq.

(2016); Phila., Pa., Code ch. 9-4100 (2015); N.Y.C., N.Y., Admin. Code sec. 20-911 (2013); Seattle, Wash., Mun. Code ch. 14.16 (2011); Westchester County, N.Y., Laws of Westchester County ch. 585 (2018).

Recently, several states and cities have also begun considering and implementing scheduling laws. In the last 5 years, for example, New York, San Francisco, Seattle, and other cities have enacted laws imposing penalties on employers who change employees' schedules without the requisite notice, and various state governments are considering and beginning to pass

similar scheduling legislation.

Some of these laws expressly exclude these penalties from the regular rate under state law,

but questions remain for employers determining how these and other penalties may affect regular rate calculations under federal law.

See

Chi., Ill., Fair Workweek Ordinance (July 24, 2019) (effective July 1, 2020); N.Y.C., N.Y., Admin. Code 20-1222 (2017); Phila., Pa., Code ch. 9-4600 (2018) (effective Jan. 1, 2020); Seattle, Wash., Mun. Code ch. 14.22.050 (2017); SB 828, 79th Leg. Assemb., 2017 Reg. Sess. (Or. 2017);

see also

Emeryville, Cal., Mun. Code 5-39.01 (2017); S.F., Cal., Police Code art. 33G (2015).

See, e.g.,

Or. Rev. Stat. Ann. sec. 653.412(7)(d) (“Regular rate of pay” does not include “[a]ny additional compensation an employer is required to pay an employee under ORS 653.442 [right to rest between work shifts] or 653.455 [compensation for work schedule changes].”).

The Department published a notice of proposed rulemaking (NPRM) in the

Federal Register

on March 29, 2019 (84 FR 11888 (Mar. 29, 2019)), inviting comments about proposed updates to its regulations in part 778 to reflect changes in the modern workplace and to provide clarifications that reflect the statutory language and WHD's enforcement practices. Additionally, the Department proposed minor clarifications and updates to part 548 of title 29, which implements section 7(g)(3) of the FLSA. Section 7(g)(3) permits employers, under specific circumstances, to use a basic rate to compute overtime compensation rather than a regular rate.

Comments were initially due on or before May 28, 2019. In response to a request for an extension of the time period for filing written comments, the Department extended the deadline to June 12, 2019 (84 FR 21300 (May 14, 2019)). The Department received approximately 80 timely comments.

See

29 U.S.C. 207(g)(3).

After considering the comments, the Department has decided to adopt the NPRM's proposed changes with some modifications. The final rule clarifies when payments for forgoing unused paid leave, payments for bona fide meal periods, reimbursements, benefit plan contributions, and certain ancillary benefits may be excluded from the regular rate. The final rule also revises certain sections of the existing regulation to more closely align with the Act. Additionally, the final rule incorporates, with modification, the proposed clarifications and updates to part 548. The final rule incorporates numerous suggestions from commenters, including adding examples of excludable state and local scheduling law payments to § 778.222, which addresses “other payments similar to call-back pay”; providing additional guidance in the preamble about how to determine whether a bonus is discretionary or nondiscretionary; revising language at §§ 778.202 and 778.205 to reflect that excludable overtime premium payments may be made pursuant to a “written or unwritten employment contract, agreement, understanding, handbook, policy, or practice”; and referencing state or local minimum wage laws as well as Federal law in the regulations at part 548 of title 29 discussing the basic rate.

The Department's estimated economic impact of this final rule follows below. The Department qualitatively estimates the potential benefits associated with reduced litigation at $281 million over 10 years, or $28.1 million per year. The Department quantitatively estimates the one-time regulatory familiarization cost of this final rule at $30.5 million, which results in a 10-year annualized cost of $3.6 million at a discount rate of 3 percent or $4.3 million at a discount rate of 7 percent.

This final rule is considered an Executive Order (E.O.) 13771 deregulatory action. Details on the estimated reduced burdens and cost savings of this final rule can be found in the rule's economic analysis.

II. Background

A. The FLSA and Regular Rate Regulatory History

Congress enacted the FLSA in 1938 to remedy “labor conditions detrimental to the maintenance of the minimum standard of living necessary for health, efficiency, and general well-being of workers[,]” which burdened commerce and constituted unfair methods of competition.

In relevant part, section 7(a) of the FLSA requires employers to pay their employees overtime at one and one-half times their “regular rate” of pay for time worked in excess of 40 hours per workweek.

When enacted, however, the FLSA did not define the term “regular rate.”

29 U.S.C. 202(a);

see

Fair Labor Standards Act of 1938, Public Law 75-718, ch. 676, 52 Stat. 1060 (codified as amended at 29 U.S.C. 201-219).

29 U.S.C. 207(a). The statutory maximum in 1938 was 44 hours per workweek; in 1939, it was 42 hours per workweek; and in 1940, it was 40 hours per workweek.

See

Public Law 75-718, 52 Stat. at 1063.

Later that year, WHD issued an interpretive bulletin addressing the meaning of “regular rate,” which WHD later revised and updated in 1939, and again in 1940. The 1940 version of the bulletin stated, among other things, that an employer did not need to include extra compensation paid for overtime work in regular rate calculations.

It also specified that the regular rate must be “the rate at which the employee is actually employed and paid and not . . . a fictitious rate which the employer adopts solely for bookkeeping purposes.”

See

Interpretive Bulletin No. 4 ¶ 13 (Nov. 1940).

Id.

¶ 18.

In 1948, the Supreme Court in

Bay Ridge Operating Co.

Aaron,

334 U.S. 446, addressed whether specific types of compensation may be excluded from the regular rate, or even credited towards an employer's overtime payment obligations. The Court held that an overtime premium payment, which it defined as “[e]xtra pay for work because of previous work for a specified number of hours in the workweek or workday whether the hours are specified by contract or statute,” could be excluded from the computation of the regular rate.

Permitting an “overtime premium to enter into the computation of the regular rate would be to allow overtime premium on overtime premium—a pyramiding that Congress could not have intended.”

The Court also held that “any overtime premium paid, even if for work during the first forty hours of the workweek, may be credited against any obligation to pay statutory excess compensation.”

By contrast, the Court noted, “[w]here an employee receives a higher wage or rate because of undesirable hours or disagreeable work, such wage represents a shift differential or higher wages because of the character of work done or the time at which he is required to labor rather than an overtime premium. Such payments enter into the determination of the regular rate of pay.”

334 U.S. at 450 n.3, 465-66.

Id.

at 464.

Id.

at 464-65.

Id.

at 468-69.

Following the

Bay Ridge

decision, in 1948, the Department promulgated 29 CFR part 778, concerning the regular rate.

This regulation codified the principles from

Bay Ridge

that extra payments for hours worked in excess of a daily or weekly standard established by contract or statute may be excluded from the regular rate and credited toward overtime compensation due, and that extra payments for work on Saturdays, Sundays, holidays, or at night that are made without regard to the number of hours or days previously worked in the day or workweek must be included in the regular rate and may not be credited toward the overtime owed.

It noted, however, that when extra payments for work on Saturdays, Sundays, holidays, or nights are contingent on the employee having previously worked a specified standard number of hours or days, such payments are true overtime premium payments that may be excluded from the regular rate and credited toward overtime compensation due.

The Department also explained that payments “that are not made for hours worked, such as payments . . . for idle holidays or for occasional absences due to vacation or illness or other similar cause” may be excluded from the regular rate, but could not be credited against statutory overtime compensation due.

See

13 FR 4534 (Aug. 6, 1948).

See

29 CFR 778.2 (1948).

See id.

Id.

In 1949, Congress responded to the

Bay Ridge

decision by amending the FLSA to identify two categories of payments that could be both excluded from the regular rate and credited toward overtime compensation due.

The first category was extra compensation for work on Saturdays, Sundays, holidays, or the sixth or seventh day of the workweek paid at a premium rate of one and one-half times the rate paid for like work performed in nonovertime hours on other days. The second category was extra compensation paid pursuant to an applicable employment contract or collective bargaining agreement for work outside of the hours established therein as the normal workday (not exceeding eight hours) or workweek (not exceeding 40 hours) at a premium rate of one and one-half times the rate paid for like work performed during the workday or workweek.

See

Public Law 81-177, ch. 352, 63 Stat. 446 (July 20, 1949). These provisions are currently codified at 29 U.S.C. 207(e)(6)-(7).

See id.

On October 26, 1949, Congress again amended the FLSA.

The amendments added, among other things, a comprehensive definition of the term “regular rate.”

“Regular rate” was defined to include “all remuneration for employment paid to, or on behalf of, the employee[,]”

with the exception of an exhaustive list of seven specific categories of payments that could be excluded from the regular rate.

Those categories of excludable payments were: (1) Gifts and payments on special occasions; (2) payments made for occasional periods when no work is performed such as vacation or sick pay, reimbursements for work-related expenses, and other similar payments that are not compensation for hours of employment; (3) discretionary bonuses, payments to profit-sharing or thrift or savings plans that meet certain requirements, and certain talent fees; (4) contributions to a bona fide plan for retirement, or life, accident, or health insurance; (5) extra compensation provided by a premium rate for certain hours worked in excess of eight in a day, 40 hours in a workweek, or the employee's normal working hours; (6) extra compensation provided by a premium rate for work on Saturdays, Sundays, regular days of rest, or the sixth or seventh days of the workweek; and (7) extra compensation provided by a premium rate pursuant to an employment contract or collective bargaining agreement for work outside of the hours established therein as the normal workday (not exceeding eight hours) or workweek (not exceeding 40 hours).

The October 1949 amendments also added a provision specifying that the last three of these categories are creditable against overtime compensation due.

See

Fair Labor Standards Amendments of 1949, Public Law 81-393, ch. 736, 63 Stat. 910.

Id.

Sec. 7, 63 Stat. at 913-14. This provision is currently codified at 29 U.S.C. 207(e).

Id.

See id.

63 Stat. at 913-14. These provisions are currently codified at 29 U.S.C. 207(e)(1)-(7).

See id.

The excludable categories of payments in sections 7(d)(6) and (7) in the October 1949 amendments were essentially the same as those that had been added in the July 1949 amendments as sections 7(e)(1) and (2); the October 1949 amendments eliminated them from section 7(e).

See id.

Public Law 81-393, 63 Stat. at 915. This provision is currently codified at 29 U.S.C. 207(h) (payments described in sections 7(e)(5)-(7) are creditable).

In 1950, the Department updated part 778 to account for the 1949 amendments to the FLSA.

These regulations explained general principles regarding overtime compensation and the regular rate, including the principle that each workweek stands on its own for purposes of determining the regular rate and overtime due.

The regulations also provided methods for calculating the regular rate under different compensation systems, such as salary and piecework compensation.

They further elaborated on the seven categories of payments that are excludable from regular rate calculations, and provided several examples.

The regulations also addressed special problems and pay plans designed to circumvent the FLSA.

See

15 FR 623 (Feb. 4, 1950) (codified at 29 CFR 778.0 through 778.27).

See

29 CFR 778.2 (1950).

See

29 CFR 778.3(b) (1950).

See

29 CFR 778.5 through 778.8 (1950).

See

29 CFR 778.9.17, 778.21 through 778.23 (1950).

In 1961 and 1966, Congress made a few minor, non-substantive language changes and redesignated certain sections.

In 1968, the Department updated part 778, principally to clarify the statutory references, update the amounts used to illustrate pay computations, and reorganize the provisions in part 778.

Over the next several decades, the Department periodically made minor changes and updates to part 778.

In 1961, Congress made non-substantive language changes to sections (d)(5) and (7).

See

Fair Labor Standards Amendments of 1961, Public Law 87-30, sec. 6, 75 Stat. 65, 70. In 1966, Congress redesignated section 7(d) as section 7(e).

See

Fair Labor Standards Amendments of 1966, Public Law 89-601, Title II, sec. 204(d)(1), 80 Stat. 830, 836. Additionally, section 7(g), which provided that extra compensation paid pursuant to sections 7(d)(5), (6), and (7) could be credited against overtime compensation due under section 7(a), was moved to section 7(h).

See id.

See

33 FR 986 (Jan. 26, 1968) (29 CFR 778.0 through 778.603).

See

36 FR 4699 (Mar. 11, 1971) (updating § 778.214 to clarify that advance approval by the Department is not required for plans providing benefits within the meaning of section 7(e)(4)); 36 FR 4981 (Mar. 16, 1971) (updating § 778.117 to clarify commission payments that must be included in the regular rate); 46 FR 7308 (Jan. 23, 1981) (updating part 778 to increase the dollar amounts used as examples in the regulations, to respond to statutory amendments affecting other parts of the FLSA, and to modify § 778.320 to clarify that pay for nonworking time does not automatically convert such time into hours worked); 46 FR 33515-02 (June 30, 1981) (correcting errors in the January 1981 update in §§ 778.323, 778.327, 778.501, 778.601); 56 FR 61100 (Nov. 29, 1991) (updating § 778.603 to address statutory amendment adding section 7(q) regarding maximum-hour exemption for employees receiving remedial education).

In 2000, Congress added another category of payments that could be excluded from the regular rate, currently contained in section 7(e)(8).

This amendment permitted an employer to exclude from the regular rate income derived from a stock option, stock appreciation right, or employee stock purchase plan, provided certain restrictions were met.

Congress also amended section 7(h) to state that, except for the types of extra compensation identified in sections 7(e)(5), (6), and (7), sums excluded from the regular rate are not creditable toward minimum wage or overtime compensation due.

In 2011, the Department updated part 778 to reflect the 2000 statutory amendments and to modify the wage rates used as examples to reflect the current minimum wage.

See

Worker Economic Opportunity Act, Public Law 106-202, sec. 2(a)(3), 114 Stat. 308 (2000).

See id.

See

76 FR 18832 (Apr. 5, 2011) (updating §§ 778.110, 778.111, 778.113, 778.114, 778.200, 778.208).

Currently, the FLSA's definition of “regular rate” and the eight categories of

excludable payments are contained in section 7(e) of the Act.

The Department's regulations concerning the regular rate requirements are contained in 29 CFR part 778. As noted above, the last comprehensive revision to part 778 was in 1968.

See

29 U.S.C. 207(e). Additionally, section 7(h) states that only payments excludable from the regular rate pursuant to sections 7(e)(5), (6), and (7) may be credited against the employer's overtime obligation and that all other excludable payments (

i.e.,

payments that qualify as excludable under sections 7(e)(1), (2), (3), (4), and (8)) are not creditable).

See

29 U.S.C. 207(h).

See

33 FR 986 (29 CFR 778.0 through 778.603).

While section 7(a) defines the general overtime entitlement in terms of an employee's regular rate, under certain circumstances, the FLSA permits employers to use a “basic rate,” rather than the regular rate as defined in section 7(e), to calculate overtime compensation.

Congress added this provision, currently contained in section 7(g), in 1949—at the same time that Congress added the definition of “regular rate” to the FLSA.

The requirements an employer must meet to use a basic rate are set forth in that same section 7(g).

29 U.S.C. 207(g).

See

Public Law 81-393, 63 Stat. at 914-15. In 1966, Congress redesignated section 7(f) as section 7(g), with section numbers (1)-(3) remaining the same; no substantive changes were made.

See

Public Law 89-601, 80 Stat. at 836.

29 U.S.C. 207(g)(1)-(3).

See id.

In 1955, the Department promulgated 29 CFR part 548 to establish the requirements for authorized basic rates under section 7(g)(3).

It amended various sections of the part 548 regulations several times over the next 12 years to reflect statutory amendments to other parts of the FLSA, including increases to the minimum wage.

The Department has not updated any of the regulations in part 548 since 1967, more than a half-century ago.

See

20 FR 5678 (Aug. 6, 1955). The regulations interpreting sections 7(g)(1)-(2) are at 29 CFR 778.415 through 778.421.

See

21 FR 338 (Jan. 18, 1956); 26 FR 7730 (Aug. 18, 1961); 28 FR 11266 (Oct. 22, 1963); 31 FR 6769 (May 6, 1966); 32 FR 3293 (Feb. 25, 1967).

B. The Department's Proposal

On March 29, 2019, the Department issued its proposal to update and revise a number of regulations in parts 548 and 778.

The Department's proposal focused primarily on clarifying whether certain kinds of “perks,” benefits, or other miscellaneous payments must be included in the regular rate. These clarifications included confirming that the cost of providing wellness programs, onsite specialist treatment, gym access and fitness classes, employee discounts on retail goods and services, and payments for tuition programs, such as reimbursement programs or repayment of educational debt, may be excluded from an employee's regular rate of pay. The Department also proposed to clarify that payments for unused paid leave, including paid sick leave, may be excluded from an employee's regular rate of pay; that reimbursed expenses need not be incurred “solely” for the employer's benefit for the reimbursements to be excludable from an employee's regular rate and that reimbursed travel expenses that do not exceed the maximum travel reimbursement permitted under the Federal Travel Regulation System and meet other regulatory requirements may be excluded from an employee's regular rate of pay; that employers do not need a prior formal contract or agreement with the employee(s) to exclude certain overtime premiums described in sections 7(e)(5) and (6) of the FLSA; and that pay for time that would not otherwise qualify as “hours worked,” including bona fide meal periods, may be excluded from an employee's regular rate unless an agreement or established practice indicates that the parties have treated the time as hours worked. Additionally, the Department proposed to provide examples of discretionary bonuses that may be excluded from an employee's regular rate of pay under section 7(e)(3) of the FLSA and to clarify that the label given to a bonus does not determine whether it is discretionary. The Department also proposed to provide additional examples of benefit plans, including accident, unemployment, and legal services, that may be excluded from an employee's regular rate of pay under section 7(e)(4) of the FLSA.

84 FR 11888.

The Department proposed two substantive changes to the existing regulations. First, the Department proposed to eliminate the restriction in 29 CFR 778.221 and 778.222 that “call-back” pay and other payments similar to call-back pay must be “infrequent and sporadic” to be excludable from an employee's regular rate, while maintaining that such payments must not be so regular that they are essentially prearranged. Second, the Department proposed to update its “basic rate” regulations, which are authorized under section 7(g)(3) of the FLSA, as an alternative to the regular rate under specific circumstances. Under the current regulations, employers using an authorized basic rate may exclude from the overtime computation any additional payment that would not increase total overtime compensation by more than $0.50 per week on average for overtime workweeks in the period for which the employer makes the payment. The Department proposed to update this regulation to change the $0.50 limit to 40 percent of the Federal minimum wage—currently $2.90.

In developing this rule, the Department was mindful of the Supreme Court's recent guidance that, to determine the scope of an exemption under the FLSA, the statutory text must be given a “fair reading” rather than a narrow reading because the FLSA's exemptions are “as much a part of the FLSA's purpose as the [minimum wage and] overtime-pay requirement[s].”

Encino Motorcars, LLC

Navarro,

138 S. Ct. 1134, 1142 (2018). As the Third Circuit recently noted in a regular rate case, “that is as should be expected, because employees' rights are not the only ones at issue and, in fact, are not always separate from and at odds with their employers' interests.”

U.S. Dep't of Labor

Bristol Excavating, Inc.,

935 F.3d 122, 135 (3d Cir. 2019).

Approximately 80 individuals and organizations timely commented on the NPRM during the 75-day extended comment period that ended on June 12, 2019. The Department received comments from a broad array of constituencies, including small business owners, employer and industry associations, individual workers, worker advocacy groups, unions, non-profit organizations, law firms, professional associations, and other interested members of the public. The majority of comments supported the Department's efforts to clarify the regular rate regulations. All timely received comments may be viewed on

www.regulations.gov,

docket ID WHD-2019-0002.

Some commenters appear to have mistakenly filed comments intended for this rulemaking into the dockets for the Department's rulemakings concerning overtime (docket ID WHD-2019-0001) or joint employer status (docket ID WHD-2019-0003) under the FLSA. The Department did not consider these misfiled comments in this rulemaking.

The Department has carefully considered the timely-submitted comments on the proposed changes. Some of the comments were general statements of support or opposition.

See

Bloomin' Brands; International Bancshares Corporation (IBC); Independent Bakers Association (IBA); National Demolition Association (NDA); National Federation of Independent Businesses (NFIB); International Association of Firefighters (Association

of Firefighters); and various individual commenters.

The Department received a number of comments that are beyond the scope of this rulemaking. These include, for example, a request to address whether restricted stock units are excludable under 29 U.S.C. 207(e)(8) of the Act, which permits an employer to exclude from the regular rate income derived from a stock option, stock appreciation right, or employee stock purchase plan.

See

Semiconductor Industry Association (SIA); National Association of Manufacturers (NAM); the Chamber of Commerce (Chamber); Partnership to Protect Workplace Opportunity (PPWO); ERISA Industry Committee (ERIC); American Benefits Council. Similarly, some commenters urged the Department to require that any payment that must be included in the regular rate must count towards the overtime salary threshold under 29 CFR part 541.

See

American Hotel and Lodging Association (AHLA); PPWO; College and University Professional Association for Human Resources (CUPA-HR). The Department did not raise these issues in its proposal, and they are therefore out of scope of this rulemaking.

Some commenters raised issues that are the subject of other on-going rulemaking efforts by the Department. For example, commenters raised concerns regarding the fluctuating workweek regulation at 29 CFR 778.114.

See

Associated Builders and Contractors; AHLA; Chamber. The Department is currently engaged in rulemaking to revise this specific regulation.

Therefore, the Department does not address these issues in this final rule.

See

Fluctuating Workweek Method of Computing Overtime, Notice of Proposed Rulemaking, 84 FR 59590 (Nov. 5, 2019).

Significant issues raised in the comments on the Department's proposal are discussed below, along with the Department's response to those comments.

III. Final Regulatory Provisions

The Department finalizes its proposals to update the regulations in parts 778 and 548 to clarify the Department's interpretation in light of modern compensation and benefits practices. The sections below discuss, in turn, each category of excludable compensation that the Department has addressed in this final rule.

A. Excludable Compensation Under Section 7(e)(2)

Many of the Department's regulatory updates in this final rule clarify the type of compensation that is excludable from the regular rate under FLSA section 7(e)(2). Section 7(e)(2) permits an employer to exclude from the regular rate three distinct categories of payment: First, “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”; second, “reasonable payments for traveling expenses, or other expenses, incurred by an employee in the furtherance of his employer's interests and properly reimbursable by the employer”; and third, “other similar payments to an employee which are not made as compensation for his hours of employment.”

In this Preamble, these clauses are referred to as: The “occasional periods when no work is performed” clause; the “reimbursable expenses” clause; and the “other similar payments” clause. The Department's regulations interpreting section 7(e)(2) are contained in §§ 778.216 through 778.224.

29 U.S.C. 207(e)(2).

1. Pay for Forgoing Holidays or Leave

The initial clause of section 7(e)(2) of the FLSA permits an employer to exclude “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 causes” from the regular rate.

Section 778.218 addresses this statutory provision and provides that payments for such time that “are in amounts approximately equivalent to the employee's normal earnings” are not compensation for hours of employment and are therefore excludable from the regular rate.

See id.

29 CFR 778.218;

see

FOH 32d03g (“Payment for absences charged against leave under a bona fide plan granting the employee a specified amount of annual, vacation, or sick leave with pay need not be included in the regular rate of pay, if the sum paid is the approximate equivalent of the employee's normal earnings for a similar period of working time. Payments for such absences may be excluded regardless of when or how the leave is taken.”).

Section 778.219 addresses a related issue: The exclusion of payments for working on a holiday or forgoing vacation leave, as distinct from the exclusion of payments for using leave.

It explains that if an employee who is entitled to “a certain sum as holiday or vacation pay, whether he works or not,” receives additional pay for each hour worked on a holiday or vacation day, the sum allocable as the holiday or vacation pay is excluded from the regular rate.

In other words, when an employee works instead of taking a holiday or using vacation leave, and receives pay for both the hours of work performed as well as the holiday or vacation leave that he or she did not take, the amount paid for the forgone holiday or vacation leave may be excluded from the regular rate. In its current form, § 778.219 addresses only pay for forgoing holidays and vacation leave but does not address sums paid for forgoing the use of other forms of leave, such as leave for illness. As explained in the NPRM, WHD has addressed payments for forgoing sick leave in its Field Operations Handbook (FOH). The FOH states that the same rules governing exclusion of payments for unused vacation leave also apply to payments for unused sick leave.

Therefore, when “the sum paid for unused sick leave is the approximate equivalent of the employee's normal earnings for a similar period of working time,” such payments are excludable from the regular rate.

See

29 CFR 778.219.

29 CFR 778.219(a).

See

FOH 32d03e(b).

Id.

To clarify and modernize the regulations, the Department proposed to update § 778.219 to address payments for forgoing both holidays and other forms of leave. The Department noted in the NPRM that it is aware that many employers no longer provide separate categories of leave based on an employee's reason for taking leave—such as sick leave and vacation leave. Instead, employers provide one category of leave, which is commonly called paid time off. The Department explained that it saw no reason to distinguish between the types of leave when determining whether payment for forgoing use of the leave is excludable from the regular rate. Rather, the central issues are whether the amount paid is approximately equivalent to the employee's normal earnings for a similar period of time, and whether the payment is in addition to the employee's normal compensation for hours worked.

Accordingly, the Department proposed to clarify that occasional payments for forgoing the use of leave are treated the same regardless of the type of leave. The Department therefore proposed to revise the title of § 778.219, clarify in § 778.219(a) that payments for all forms of unused leave are treated the same for purposes of determining whether they may be excluded from the regular rate, and add an example concerning payment for forgoing the use of paid time off. The NPRM noted that the proposed changes reflected the

Department's longstanding practice of applying the same principles to payments of unused holiday, vacation, and sick leave.

The NPRM stated that the proposed changes would ensure the consistent application of the same principles across differing leave arrangements.

The Department also proposed to clarify that payments for forgoing the use of leave are excludable from the regular rate regardless of whether they are paid during the same pay period in which the previously scheduled leave is forgone or during a subsequent pay period as a lump sum.

See

FOH 32d03e.

See, e.g., Balestrieri

Menlo Park Fire Prot. Dist.,

800 F.3d 1094, 1103-04 (9th Cir. 2015) (holding that annual leave comprised of both sick and vacation leave need not be included in the regular rate under section 7(e)(2)). The NPRM explained that such payments need not be included in the regular rate under section 7(e)(2) for the same reason that payments for unused vacations or holidays need not be included; it makes no difference that payments for unused annual leave or paid time off may include unused sick leave.

see also

29 CFR 778.218.

CWC suggested that the Department add an example illustrating the difference between attendance-based incentive bonuses, which must be included in the regular rate, and valid payments for forgoing leave, which can be excluded. The Department declines to modify the regulatory text as suggested. As discussed in the NPRM, in some situations, employers may make payments to encourage attendance at work rather than compensating employees for forgoing the use of leave. Attendance bonuses are typically non-discretionary bonuses that must be included in the regular rate because they are made “pursuant to [a] contract, agreement, or promise causing the employee to expect such payments[.]”

An important distinction between an excludable leave buy-back payment and a non-excludable attendance bonus is that an excludable buy-back payment results in the employee no longer having that leave available to use,

i.e.,

the employee's leave balance is diminished by the amount of leave “bought back.” In contrast, where an employee receives an additional payment that does not affect his or her leave balance, or the payment is otherwise tied to factors that are not related to the holiday, vacation, or illness period, such payment may be an attendance bonus that is not excludable from the regular rate. As CWC noted in its comment, the distinction between an excludable payment for forgoing leave and an attendance bonus is usually very fact specific.

Because this issue is more appropriately addressed through subregulatory guidance, the Department declines to amend the regulation as suggested. The Department notes, however, that § 778.219(a), as adopted in this final rule, does not affect § 778.211(c), which addresses the exclusion of discretionary bonuses from the regular rate pursuant to FLSA section 7(e)(3)(a).

29 U.S.C. 207(e)(3);

see

29 CFR 778.211(c);

see also

84 FR 11888, 11892 n. 57.

See

WHD Opinion Letter FLSA2009-19, 2009 WL 649021 at *4 (Jan. 16, 2009) (concluding that vacation buy-back payments were excludable, but stipends for nonuse of sick leave encouraged employees not to use or abuse sick leave and therefore were a form of attendance bonus that was not excludable); WHD Opinion Letter FLSA2006-18NA, 2006 WL 4512960, at *2 (July 24, 2006) (holiday payments made to employees when they forgo holidays need not be included in the regular rate because the employees continued to receive compensation at their customary rate for hours worked in addition to receiving holiday pay); WHD Opinion Letter FLSA2004-2NA (April 5, 2004) (cashed-out accrued vacation time need not be included in the regular rate because such payments were made at employees' applicable hourly rate and in addition to receiving their customary payment for hours worked).

See

29 U.S.C. 207(e)(3)(a); 29 CFR 778.211(c).

A few commenters addressed the requirement that the pay for forgoing the leave be approximately equivalent to the employee's normal earnings.

See

Chamber; NPELRA; Association of Firefighters. The Chamber asserted that there was no statutory basis for requiring that the payment for the forgone leave be approximately equivalent to the employee's normal earnings for the amount of time covered by the forgone leave and therefore argued that this requirement be removed entirely. NPELRA requested that the proposed regulatory language in § 778.219 be modified to permit exclusion of a payment for an employee's unused leave where that

payment is a percentage of the amount that would normally be paid to the employee when using the leave. NPELRA stated that instead of paying 100 cents on the dollar, employers should be permitted to pay a percentage of accrued leave, which is often based on a calculation negotiated with union representatives and takes into account time-in-service and the total amount of sick leave that an employee has accrued. NPELRA provided an example in which an employee with 20 or more years of service would be paid out for his or her unused sick leave at 20 percent if the employee had accrued between 1 and 125 hours of leave, 40 percent for 126 to 255 hours, 60 percent for 256-380 hours, and 80 percent for 381-607 hours. By contrast, Association of Firefighters commented that the Department did not provide any definition of what constitutes an “approximate equivalent” amount and expressed concern that buy-back payments at “sub-premium” rates will now be permitted.

The Department declines to modify the language in proposed § 778.219 to either remove the requirement that payments be made in amounts “approximate[ly] equivalent” or to provide a formulaic definition as to what constitutes an “approximate equivalent.” As an initial matter, the Department notes that this requirement is currently required under § 778.218, which addresses the statutory provision providing for exclusion of payments for occasional periods when no work is performed due to vacation, holiday, and illness. Section 778.218 has long provided that payments for such time that “are in amounts approximately equivalent to the employee's normal earnings,” are not compensation for hours of employment and are therefore excludable from the regular rate.

Given that § 778.219's exclusion of pay for forgoing leave is derived from § 778.218, the well-established inclusion of this requirement in the latter warrants its inclusion in the former. Additionally, requiring excludable payments for forgoing leave to be approximately equivalent to the employee's normal earnings helps ensure that the payments are true leave buy-back payments rather than attendance bonuses, which are generally considered to be non-discretionary bonuses that must be included in the regular rate. The example provided by NPELRA, which results in buying back sick leave in amounts that are not approximately equivalent to the employee's normal earnings for a similar period of working time, illustrates why this requirement is necessary. In that example, some of the forgone sick leave is “bought back” at only 20 percent of the dollar value of that leave. For these reasons, the Department has decided to adopt § 778.219 as proposed.

29 CFR 778.218;

see

Association of Firefighters and the AFL-CIO contended that the Department's proposal to permit the exclusion of pay for forgoing sick leave is contrary to two appellate cases.

First, the court in

Chavez

relied on § 778.219—and in particular, its explicit reference to pay for vacation leave but lack of reference to pay for sick leave—to conclude that vacation-leave buy-back payments were excludable, but that sick-leave buy-back payments must be included in the regular rate.

In characterizing the Department's position on this issue, however, the court did not acknowledge WHD's statement in the FOH that the same rules governing exclusion of payments for unused vacation leave also apply to payments for unused sick leave.

Moreover, in citing a 2009 WHD opinion letter,

the court did not consider the fact-specific nature of the buy-back program at issue there, which, as discussed above, functioned as an attendance bonus. Nothing in the current language in § 778.219 or the 2009 opinion letter state that a sick-leave buy-back payment can never be excluded from the regular rate. In the second case,

Acton,

the court neither cited nor discussed the language in section 7(e)(2) that permits exclusion of payments for occasional periods when no work is performed due to vacation, holiday, or illness, or § 778.219, which interprets this statutory provision. Instead, the court mistakenly applied § 778.223 to determine whether buy-back payments were similar to call-back pay, and ultimately concluded that the sick-leave buy back must be included in the regular rate as it constitutes compensation for the general work duty of regular attendance over a significant period of an employee's work tenure.

Thus, the court's decision in

Acton

does not inform the proper interpretation of the statutory exclusion of payments for occasional periods when no work is performed due to vacation, holiday, or illness contained in section 7(e)(2) and explained in § 778.219.

Contrary to these two cases, the Department agrees with both the conclusion and underlying reasoning in

Balestrieri

Menlo Park Fire Protection District.

There, the court held that buy back payments for annual leave, which included both sick and vacation leave, need not be included in the regular rate. While acknowledging that some sick-leave buy-back programs, such as the one at issue in the 2009 WHD opinion letter, could function like an attendance bonus and therefore require their inclusion in the regular rate, the annual leave that was bought back in

Balestrieri

did not differentiate between sick leave and vacation leave. As a result, any portion of the annual leave that could be attributed to sick leave did not function as an attendance bonus.

See Chavez

City of Albuquerque,

630 F.3d 1300, 1309 (10th Cir. 2011);

Acton

City of Columbia,

436 F.3d 969, 977-78 (8th Cir. 2006).

See

630 F.3d at 1308-09.

See

FOH 32d03e.

WHD Opinion Letter FLSA2009-19, 2009 WL 649021 (Jan. 16, 2009).

See

436 F.3d at 977.

See

29 U.S.C. 207(e)(2); 29 CFR 778.219.

See

800 F.3d 1094, 1103 (9th Cir. 2015).

See

800 F.3d at 1102-04.

Lastly, IMLA requested that the Department provide an additional example to § 778.219(a) concerning the excludability of “holiday-in-lieu” pay from the regular rate. IMLA notes that some employees, particularly public sector emergency response personnel, work a set schedule without regard to holidays. Due to the nature of their work, such employees may be called upon to forgo a recognized holiday if their schedule requires them to work that day or if an emergency arises. IMLA states that the current regulations permit the excludability of such payments, but that several courts have nevertheless held that similar forms of “holiday-in-lieu” payments must be included in the regular rate.

See Hart

City of Alameda,

No. C-07-5845MMC, 2009 WL 1705612, at *3 (N.D. Cal. June 17, 2009) (holiday pay received by city police officers every pay period must be included in the regular rate);

Lewis

County of Colusa,

No. 2:16-cv-01745-VC, 2018 WL 1605754, at *3 (E.D. Cal. Apr. 3, 2018) (defendant did not meet burden to show that biannual lump-sum holiday in-lieu payments to safety officers and dispatchers fall squarely within section 7(e)(2));

McKinnon

City of Merced,

No. 118CV01124LJOSAB, 2018 WL 6601900, at *5-8 (E.D. Cal. Dec. 17, 2018) (finding that payments are not excludable where it was “not apparent that Plaintiffs are in fact entitled to paid time off at the holidays which they are able to forego”).

Current Department regulations support excluding holiday-in-lieu pay from the regular rate. Under 29 CFR 778.219, where an employee forgoes his

or her holiday and works, and is paid for his or her normal work plus an additional amount for the holiday, the additional amount paid for working the holiday is not included in the regular rate. The Department applied this principle in a 2006 opinion letter concluding that holiday-in-lieu pay could be excluded from the regular rate where the employer provided nine “recognized” holidays and two “floating” holidays paid in a lump sum, and on occasion when employees forgo a holiday and work they received both pay for the hours worked and holiday pay.

The Department notes that it does not matter whether the employee voluntarily forgoes the holiday to work or is required to work the holiday by the schedule set for the employee. Nothing in this regulation makes the excludability of such payments dependent on the employee having the option to work or not work on the holiday. All that is required for the holiday-in-lieu pay to be excludable is that the employee is paid an amount for the holiday, in addition to being paid for his hours worked on the holiday.

In response to IMLA's comments, the Department has added an additional example to § 778.219(a) involving employees who work a set schedule irrespective of holidays to clarify the regulation.

FLSA2006-18NA, 2006 WL 4512960 (July 24, 2006).

Cf.

WHD Opinion Letter FLSA, 1999 WL 1788163, at *2 (Sept. 30, 1999) (payments received by employees were required to be included in the regular rate where employees were not entitled to take leave on holidays and instead received an additional 5 percent of base pay each pay period as “in lieu of holiday pay.”).

Thus, the Department disagrees with the

McKinnon

court's reliance on the word “forgo” in § 778.219 to mean that the employee must have the option of not working on the holiday for the holiday-in-lieu pay to be excludable.

See McKinnon,

2018 WL 6601900 at *5.

2. Exclusion of Compensation for Bona Fide Meal Periods

Section 778.218 addresses the clause of FLSA section 7(e)(2) concerning payments made for occasional periods when no work is performed and provides that when payments for such time “are in amounts approximately equivalent to the employee's normal earnings,” they are not compensation for hours of employment and may be excluded from the regular rate.

Section 778.218(b) states that this clause “deals with the type of absences which are infrequent or sporadic or unpredictable” and “has no relation to regular `absences' such as lunch periods nor to regularly scheduled days of rest.”

29 CFR 778.218;

see

29 U.S.C. 207(e)(2).

29 CFR 778.218(b).

Section 778.320 addresses “[h]ours that would not be hours worked if not paid for,” and identifies “time spent in eating meals between working hours” as an example.

Section 778.320(b) further states that even when such time is compensated, the parties may agree that the time will not be counted as hours worked.

See

29 CFR 778.320.

The Department proposed to remove the reference to “lunch periods” in § 778.218(b) to eliminate any uncertainty about its relation to § 778.320 concerning the excludability of payments for bona fide meal periods from the regular rate. As one court noted, the existing regulations in §§ 778.218 and 778.320 “appear somewhat inconsistent” on the excludability from the regular rate of compensation for bona fide meal periods.

In 1986, WHD acknowledged in an opinion letter “that the reference to meal periods in section 778.218(b) of Part 778 may not be compatible with the position which is contained in section 778.320(b),” and indicated that the issue was under review.

The Department subsequently clarified in a 1996 opinion letter that pay provided for a bona fide meal period is excludable from the regular rate under § 778.320(b).

As explained in the NPRM, while the Department clarified its position in an opinion letter more than 20 years ago, it is nonetheless concerned that the language in § 778.218(b) may cause confusion concerning the excludability of pay for bona fide meal periods. Thus, to remove any ambiguity and to codify its interpretation in regulation, the Department proposed to delete the reference to “lunch periods” from § 778.218(b).

Smiley

E.I. Dupont De Nemours & Co.,

839 F.3d 325, 331 n.5 (3d Cir. 2016).

WHD Opinion Letter FLSA-937 (July 22, 1986).

See

WHD Opinion Letter FLSA, 1996 WL 1031805 (Dec. 3, 1996);

see also

WHD Opinion Letter FLSA-828 (July 19, 1976) (“[r]eimbursement to an employee for expenses incurred on behalf of an employer” would not become part of the regular rate); WHD Opinion Letter FLSA-940 (Mar. 9, 1977) (regular rate shall not include “reimbursement for expenses where an employee incurs out of pocket expenses on the employer's behalf”); WHD Opinion Letter FLSA, 1985 WL 1087356, at *2 (July 12, 1985) (reimbursement must be for “expenses incurred by the employee on the employer's behalf or convenience”).

FOH 32d05a(a).

In the NPRM, the Department pointed out that, consistent with the Department's practice and guidance, courts have not analyzed whether the expenses at issue were incurred solely for the employer's convenience when determining whether they are excludable from the regular rate. Instead, courts have emphasized the statutory requirement that the expenses need only benefit the employer.

See, e.g., Berry

Excel Grp., Inc.,

288 F.3d 252, 253-54 (5th Cir. 2002) (concluding that reimbursements of travel expenses were primarily for the employer's benefit; therefore, such expenses were excluded from the regular rate);

see also

29 CFR 778.212(b) (explaining that if a bonus is “consider[ed] . . . a part of the wages” or if “paid pursuant to a contract,” it is not in the nature of a gift).

148

29 CFR 778.212(c).

Several commenters asked the Department to clarify that childcare services or subsidies are excludable from the regular rate.

See, e.g.,

Chamber; Associated Builders and Contractors; HR Policy; CWC. Employer-provided childcare services and subsidies are generally unrelated to the quality or quantity of work performed. However, in the past, the Department has taken a broad view of what is considered to be a “wage” under 3(m) of the FLSA and as such, some payments for childcare services or subsidies may be considered a wage. Payments for childcare services or subsidies are excludable from the regular rate under (e)(2)'s “other similar payments” clause to the extent such payments are not wages under section 3(m).

149

For instance, routinely-provided childcare qualifies as an in-kind reimbursement for “expenses normally incurred by the employee for his own benefit,” which are wages that must be included in the regular rate.

150

However, emergency childcare services provided by employers as an important component of their work-life support packages do not meet this test and may be excluded from the regular rate, if such services are not provided as compensation for hours of employment. Emergency care is provided in the case of unforeseen circumstances, such as when schools or daycares are closed for bad weather or when a child is sick. If these payments are not tied to the quality or quantity of work performed, they are properly excluded from the regular rate under section 7(e)(2)'s “other similar payments” clause.

149

See

Opinion Letter FLSA-642 (Jan. 23, 1983) (deductions from employees' wages for childcare payments and reimbursement for childcare expenses are wages under section 3(m) and must be included in employees' regular rates);

see also

Opinion Letter (Apr. 1, 1992) (employer payments that employees may redesignate for child care benefits must be included in the regular rate of pay).

150

29 CFR 778.217(d);

see

29 CFR 531.37(b).

Finally, some of the items raised by commenters were outside the scope of the Department's proposal, and better addressed in a separate rulemaking. These include meals, relocation stipends,

151

commissions, and programs that issue points redeemable for merchandise.

See

PPWO; Hancock Estabrook, LLP; SHRM; Seyfarth; Chamber.

151

Pursuant to guidance in its Field Operations Handbook, the Department generally considers sums “paid as an incentive to attract employees to an isolated or otherwise undesirable job site” to be includable in the regular rate. FOH 32c00(b)(6).

b. Tuition

The Department proposed adding an example in § 778.224(b)(5) clarifying that certain tuition programs offered by employers may be excludable from the regular rate. The NPRM noted that some employers today offer discounts for online courses, continuing-education programs, modest tuition-reimbursement programs, programs for repaying educational debt, and the like. Unlike wage supplements, the Department explained, these tuition programs are not fungible, any-purpose cash, but must be directed toward particular educational and training opportunities. These programs are also optional, appeal only to those employees who want to use them, and are directed toward educational and training pursuits outside the employer's workplace. Such tuition programs do not meet the basic necessities of life, such as food, clothing, or shelter. While the educational benefit may result in employees better able to accomplish the employer's objectives, these programs are not directly connected to the employees' day-to-day duties for the employer. The NPRM stated that as long as tuition programs are available to employees regardless of their hours worked or services rendered, and are instead contingent merely on one's being an employee, these programs would qualify as “other similar payments” under section 7(e)(2).

152

See Reich,

57 F.3d at 578 (payments under section 7(e)(2) are those “that do not depend at all on when or how much work is performed”);

Minizza,

842 F.2d at 1462 (payments under section 7(e)(2) all “share the essential characteristic . . . of not being compensation for hours worked or services rendered”).

The Department noted in the NPRM that this clarification, permitting tuition programs to be excluded from the regular rate, would not affect the Department's regulations at § 531.32 referencing “meals, dormitory rooms, and tuition furnished by a college to its student employees” as an “other facility.”

153

The college environment is a unique context in which learning, work, and daily living are inextricably connected, tightly knit, and often all provided by the same entity, that being the college.

153

29 CFR 531.32(a).

The Department received numerous comments in support of this clarification.

See, e.g.,

PPWO; NPELRA; SHRM; Associated Builders and Contractors; Chamber; SIGMA. The Department also received a few comments opposed to this clarification as proposed and that suggested modifications to the regulatory language in this section.

See, e.g.,

NELP; NELA; Economic Policy Institute (EPI).

Several commenters requested additional guidance on the types of tuition benefits encompassed by the proposed rule.

See

ERIC; American Benefits Council; Chamber; CWC; HR Policy; PPWO. Payments for an employee's current coursework, payments for an employee's online coursework, payment for an employee's

family members' tuition, and student loan repayment programs each fit within the exclusion so long as they are not tied to hours worked, services rendered, or other conditions related to quality or quantity of work performed (except for conditions as stated in the rule). Of course, tuition benefits for coursework directly related to the employee's job are excludable under the reimbursements clause of section 7(e)(2).

154

See

29 CFR 778.217;

see also

29 CFR 531.32. However, tuition programs are only excludable from the regular rate under section 7(e)(2) to the extent they are not a wage under section 3(m).

157

29 U.S.C. 207(e)(2).

6. Show-Up Pay, Call-Back Pay, and Payments Similar to Call-Back Pay

Section 778.220 excludes from the regular rate “show-up” or “reporting” pay, which is defined as compensation for a specified minimum number of hours at the applicable straight-time or overtime rate on “infrequent or sporadic” occasions in which an employee is not provided with the expected amount of work after reporting as scheduled.

158

Payments for hours actually worked are included in the regular rate; amounts beyond what the employee would receive for the hours worked are excludable.

158

See

29 CFR 778.220.

Section 778.221 addresses “call-back” pay. Call-back pay is additional compensation for calling an employee back to work without prearrangement to perform extra work after the employee's scheduled hours have ended. It is typically paid for a specified number of hours at the applicable straight-time or overtime rate.

159

Call-back pay is treated the same as show-up pay under § 778.220.

159

See

29 CFR 778.221(a).

Section 778.222 addresses “other payments similar to `call-back' pay,” which are “extra payments made to employees on infrequent and sporadic occasions, for failure to give the employee sufficient notice to report for work on regular days of rest or during hours outside of his regular work schedule,” and “extra payments made, on infrequent and sporadic occasions, solely because the employee has been called back to work before the expiration of a specified number of hours between shifts or tours of duty, sometimes referred to as a `rest period.' ”

160

Such time is treated the same as show-up pay under § 778.220 and call-back pay under § 778.221. Sections 778.220, 778.221, and 778.222 all currently require that the payments be “infrequent and sporadic” to be excludable from the regular rate.

160

29 CFR 778.222.

Show-up or reporting pay is paid when the employee is scheduled to work but the employer fails to provide the expected amount of work.

161

Show-up pay is therefore excludable under the first clause of section 7(e)(2), which excludes payments made for “occasional periods” when no work is performed due to the “failure of the employer to provide sufficient work.”

162

Section 778.220 accordingly limits exclusion of such payments to when they are made “on infrequent and sporadic occasions.”

163

161

Since 1940, the Department's position has been that show-up pay that exceeded pay due for hours worked was meant to compensate the employee for the consumption of his time and discourage employers from calling in employees for only a fraction of a day. Interpretive Bulletin No. 4 ¶ 70(8).

162

29 U.S.C. 207(e)(2).

163

29 CFR 778.220.

In contrast, call-back pay and other payments similar to call-back pay are not made for periods when the employer fails to provide sufficient

work, but are instead additional payments made to compensate the employee when the employer provides unanticipated work.

164

As such, as explained in the NPRM, these payments do not fall under the first clause of section 7(e)(2). The Department has stated that call-back pay described in § 778.221 and the other payments described in § 778.222 instead fall under the “other similar payments” clause of section 7(e)(2)—which Congress did not restrict to “occasional periods” (unlike the first clause of section 7(e)(2)).

165

The NPRM noted that the FLSA does not require that payments under §§ 778.221 and 778.222 be only “occasional” to be excluded from the regular rate. Accordingly, the Department proposed removing the regulatory restriction that requires the payments discussed in §§ 778.221 and 778.222 to be “infrequent and sporadic.”

166

164

29 CFR 778.221 through 778.222.

165

See

WHD Opinion Letter FLSA-574 (Nov. 18, 1964) (“turn around” payments excludable under third clause); WHD Opinion Letter FLSA-933 (July 20, 1964) (payment for failure to provide rest period excludable under third clause); WHD Opinion Letter FLSA (Jan. 1, 1964) (stating that extra payments “made for recall to work outside of regular working hours and for shortened `rest periods' between shifts . . . may be excludable from the regular rate under the third clause” of section 7(e)(2)).

166

The Department also proposed to update the reference to § 778.222 that appears in § 778.203(d).

Although the Department proposed removing the words “infrequent and sporadic” from §§ 778.221 and 778.222, the Department proposed to include in § 778.222 language that has long been in § 778.221 explaining that payments excluded under these provisions must still be “without prearrangement” in order to be excludable from the regular rate.

167

The proposed rule provided an example of payments made without prearrangement by describing an employer retailer who called in an employee to help clean up the store for 3 hours after an unexpected roof leak, and then again 3 weeks later for 2 hours to cover for a coworker who left work for a family emergency. The proposed rule stated that payments for those instances would be without prearrangement and any call-back pay that exceeded the amount the employee would receive for the hours worked would be excludable. The proposed rule also clarified that when payments under §§ 778.221 and 778.222 are so regular that they, in effect, are prearranged, they are compensation for work and should be included in the regular rate. The proposed rule provided an example of an employer restaurant calling in an employee server for two hours of supposedly emergency help during the busiest part of Saturday evening for 6 weeks out of 2 months in a row, and explained that those payments would essentially be prearranged and all of the call-back pay would be included in the regular rate. The Department further proposed to clarify that the regulations apply regardless of whether the compensation is pursuant to established practice, an employment agreement, or state or local law.

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29 CFR 778.221;