Though most employers are focused on COVID-19 issues, employers and the government are still multitasking and addressing other issues. The Wage and Hour Division (WHD) of the U.S. Department of Labor is no exception.
Consequently, on March 26, 2020, the WHD issued three opinion letters offering interpretations of the Department’s final rule on the Fair Labor Standard’s Act (FLSA) regular rate requirements. All three involved different types of income and whether or not they must be included in the regular rate of pay for the purpose of calculating overtime pay.
Non-Discretionary “Christmas Bonuses” are not Excludable
In Opinion Letter FLSA2020-3, the WHD opined that when a Christmas bonus is non-discretionary, it must be included in an employee’s regular rate. An Alabama City passed a resolution in 1981 entitling eligible city employees to longevity awards of $2 per month for each whole year of the employee’s tenure. The City had been paying the award out every two weeks, but was considering paying the award in a one-time lump sum near Christmas. The WHD stated that since the award was required by the resolution, it was non-discretionary and must be included in the employee’s regular rate even if paid in a lump sum at Christmastime. The WHD noted that if the resolution said the City “may” pay longevity awards, instead of “shall” pay, then the awards would not need to be included in the regular rate.
Referral Bonuses Are Excludable, But Longevity Bonuses May Not Be
Next, in Opinion Letter FLSA2020-4, the WHD addressed a referral bonus program, where an employee who neither works in human resources nor has any recruiting or hiring responsibilities, would receive a referral bonus first when the individual referred by the employee was hired, and then again a year later if both the referring employee and the referred employee were still employed. The WHD opined that the first payment constitutes a referral bonus under the 2019 Regular Rate rule because (1) participation in recruitment activities is voluntary; (2) providing a name as a potential new employee does not involve significant amounts of time; and (3) the employee’s recruitment activities are limited to after-hours solicitation of friends, relatives, and acquaintances. Therefore, the first payment was excluded from the employee’s regular rate.
However, since the referring employee must be employed for a year after making the referral to receive the second payment, the WHD stated that this payment is a longevity award, not a referral bonus. As such, it is only excludable if (1) it is not measured by hours worked, production, or efficiency; and (2) the employee does not have a contractual right to the payment. Here, the WHD was unsure if the referral program would confer on the employee a contractual right to the second payment and could therefore not answer whether this payment is excludable from the employee’s regular rate.
Employer’s Contributions to a Group-Term Life Insurance Policy May Be Excludable
Finally, in Opinion Letter FLSA2020-5, the WHD addressed whether an employer’s contributions to a group-term life insurance plan must be included in the regular rate since section 79 of the Internal Revenue Code (IRC) requires an employer to report these contributions as part of the employee’s taxable gross income. The WHD opined that the fact that the income is taxable under the IRC does not mean the income is included as part of the regular rate. The WHD stated that if the criteria of 29 U.S.C. § 207(e)(4) (i.e., “contributions irrevocably made by an employer 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”) are met, the contributions are excludable regardless of the fact that they are taxable under the IRC.
These Opinion Letters highlight that compliance with the FLSA can be nuanced, particularly with respect to what counts as “hours worked,” what pay must be included in the “regular rate,” etc.
Employers should take this opportunity to reassess their regular rate calculations and overall FLSA and related state law compliance. Dykema’s Labor and Employment attorneys are available to offer advice and guidance.