On March 26, 2020, the U.S. Department of Labor (DOL) issued a series of opinion letters clarifying how to calculate properly an employee’s “regular rate” under the Fair Labor Standards Act (FLSA) for overtime payment purposes. Together, these three opinion letters address specific types of compensation and how they affect an employee’s regular rate including: (i) employee longevity awards/bonuses; (ii) referral bonus programs; and (iii) an employer’s contributions to a group-term life insurance policy.
The FLSA requires payment “at a rate not less than one and one-half times the regular rate at which [an employee] is employed” to all non-exempt employees for all hours worked in excess of 40 hours in a work week. The “regular rate” includes “all remuneration for employment paid to, or on behalf of, the employee,” subject to eight statutory exclusions.
Each of the DOL’s recent opinion letters deals with a situation that arguably fits within the statutory exclusions under the FLSA. Below is a summary of each of the issues presented in the opinion letters, a brief synopsis of the facts underlying the issue and the DOL’s opinion on each.
(1) Mandatory Employee Longevity Bonuses
Issue: Must a non-discretionary annual longevity payment be included in the employee’s regular rate of pay?
Facts: An employer’s policy provides that all eligible employees will receive a mandatory incentive award to reward longevity. The award is calculated at $2 per month of employment. The bonus is paid biweekly, but the employer is contemplating a one-time bonus to be paid at Christmas time.
Opinion: Longevity payments of this sort are not excludable “payments in the nature of gifts” under the FLSA. Instead, the employer’s policy (in this case, a city’s resolution) demonstrated that the payments were non-discretionary and, therefore, must be included in the regular rate. If the payments were discretionary, however, the DOL suggested that this type of longevity payment could be excludable under the FLSA.
(2) Referral Bonus Programs
Issue: Must an employee referral bonus be included in a referring employee’s regular rate?
Facts: A voluntary employee referral bonus program offers employees who refer candidates for hire a bonus in two equal installments: (i) the first installment is paid to the referring employee when the employer hires the referred employee; and (ii) the second installment is paid one year later, provided both the referring employee and new hire are still actively employed.
Opinion: The two installments are treated differently.
The first installment need not be included in the referring employee’s regular rate because the payment: (1) is unrelated to work performed (the employee does not work in human resources, is not responsible for recruiting, etc.); and (2) participation in the referral program is strictly voluntary, does not take significant time and is limited to conversations as part of the employees’ social affairs outside of work hours.
The second installment, however, is deemed a longevity bonus because it is contingent on the referring employee remaining employed with the employer for one year. (If the referring employee were eligible for the second payment regardless of whether he remained employed, or if a shorter amount of time of continued employment were required, such as a single pay period, the result could be different.) Whether a longevity bonus must be included in the regular rate depends on whether it is in the “nature of [a] gift,” and depends on two factors. In this case, the question turns on whether the referring employee has a contractual right to the second installment. If payment of the second instalment is contractually enforceable, it must be included in the regular rate. If the payment of the second installment is not contractually enforceable and is instead a pre-announcement of the timing and amount of such payment, it would not be included in the regular rate.
(3) Employer Contributions to a Group-Term Life Insurance Policy
Issue: Must certain benefits imputed to an employee as income for tax purposes be included in the employee’s regular rate?
Facts: An employer contributes to a group-term life insurance policy for non-exempt employees. According to the employer, Internal Revenue Code § 79 requires employers to report such contributions as part of an employee’s taxable gross income.
Opinion: Contributions irrevocably made to a third party pursuant to a bona fide benefit plan are excludable from the regular rate. Thus, an employer’s contributions to a group-term life insurance policy need not be included in an employee’s regular rate regardless of how such contributions are treated for income tax purposes. Employers, however, must ensure that the employer’s contributions on the employee’s behalf to the employer-provided policy meet the statutory and regulatory requirements. Furthermore, this assumes that the costs represent genuine employer contributions, and not an employee election to have the employer purchase excess coverage on the employee’s behalf using a deduction from wages.
Employers should ensure they calculate overtime correctly by first including all appropriate compensation in each employee’s “regular rate.” For assistance in calculating the regular rate under the FLSA, or for any other question related to employment law, contact the authors of this article or another member of the McGuireWoods labor and employment team.