U.S. Department of Labor Issues New Opinion Letters Clarifying Regular Rate Principles
In addition to its recent, exigent responsibility of preparing guidance on the protections and relief offered by the Families First Coronavirus Response Act, the U.S. Department of Labor’s Wage and Hour Division (“WHD”) has issued three new opinion letters addressing the excludability of certain types of payments from the regular rate of pay under the Fair Labor Standards Act (“FLSA”). While these opinion letters do not tread new ground, they are useful reminders of important regular rate principles and merit careful review.
As background, under the FLSA, an employer must pay a non-exempt worker at least one and a half times the employee’s “regular rate” for all hours worked in excess of forty hours in a workweek. 29 U.S.C. § 207(a)(1). The regular rate includes nearly “all remuneration for employment paid to, or on behalf of, the employee,” with few exceptions. Section 7(e) of the FLSA provides eight distinct types of payments that the law excludes from the regular rate, such as fully discretionary bonuses and certain payments for non-working time, among others. 29 U.S.C. § 207(e).
In FLSA2020-3, the WHD analyzed whether the regular rate includes length-of-service payments required by a municipal resolution. As described in the employer’s letter requesting the opinion, eligible employees “shall” (i.e., must) receive longevity awards in the amount of $2 per month for each whole year of the employee’s tenure. While the municipality currently pays such awards every two weeks, the employer contemplates paying such awards in a one-time lump sum each year around Christmas time.
The FLSA expressly excludes from the regular rate “payments in the nature of gifts made at Christmas time or on other special occasions, as a reward for service, the amounts of which are not measured by or dependent on hours worked, production, or efficiency[.]” 29 U.S.C. § 207(e)(1). Under the implementing regulations, if a “bonus paid at Christmas or on other special occasion is a gift or in the nature of a gift, it may be excluded from the regular rate under Section 7(e)(1) even though it is paid with regularity so that the employees are led to expect it[.]” 29 C.F.R. § 778.212(c). However, bonuses that are so substantial “that it can be assumed that employees consider it part of the wages for which they worked” and those that are required by law are not considered gifts for purpose of exclusion from the regular rate.” 29 C.F.R. § 778.212(b).
Because a municipal resolution mandates the longevity payments at issue in the opinion letter (even if their form and timing is subject to discretion), the WHD concluded that they are not excludable payments in the nature of gifts and therefore become part of the regular rate. As a final note, the WHD advised that if the municipal resolution had merely authorized but not required longevity payments at Christmas, they could be excludable from the regular rate under Section 7(e)(1), even if made year after year.
In FLSA2020-4, the WHD analyzed whether certain referral bonuses fall within the regular rate. The referral bonus proposed in the employer’s letter would be payable in two equal installments—the first, upon the employer’s hiring of the referred employee, and the second, upon the one-year employment anniversary of the referred employee, provided that the referring employee remains actively employed. The bonus would be available only to employees who do not work in Human Resources and have no job responsibilities associated with employee recruitment, selection, or hiring. Participation in the program would be voluntary, would not require any significant time, and would be limited to social conversations the employee has outside of work hours.
Generally, sums paid to an employee for recruiting another to join his or her employer’s workforce need not be included in the regular rate if three conditions are met: (1) participation in recruitment activities is strictly voluntary; (2) the employee’s efforts in connection with recruitment activities do not involve significant amounts of time; and (3) recruitment activities are limited to after-hours solicitation among friends, relatives, neighbors, and acquaintances as part of the employee’s social affairs. See 84 FR 68,755-56; 29 C.F.R. § 778.211(d). The proposed referral program met all three conditions, and therefore, the WHD concluded that the first installment of the referral bonus is excludable from the regular rate.
The WHD reached a different conclusion regarding the second installment. Because payment of the second installment would be contingent on the referring employee (in addition to the referred employee) remaining employed for one year after the hiring of the referred employee, it was more akin to a longevity bonus—like that discussed in FLSA2020-3—rewarding the referring employee for an additional year of service. If the second installment was not contingent on the referring employee’s continued employment, or required a shorter amount of time of continued employment, then it likely would not be like a longevity bonus, and instead, could fall outside the regular rate.
The WHD further noted that even as a longevity bonus, the second installment still could be excludable from the regular rate as a “payment in the nature of gifts … as a reward for service” under Section 7(e)(1), provided it was not (1) measured by hours worked, production, or efficiency; or (2) paid pursuant to a contract. 29 C.F.R. § 778.212(b). If either of these factors is present, the longevity bonus becomes part of the regular rate. Based on the facts provided by the employer, the first condition for exclusion as a gift would be met but it was unclear whether there was an enforceable contractual right to the payment of the second installment. The WHD opined, therefore, that if payment of the second installment would be contractually enforceable, then it is part of the regular rate.
An Employer’s Contributions to a Group-Term Life Insurance Policy
In FLSA2020-5, the WHD analyzed whether the regular rate must include the portion of an employer contribution to group term life insurance coverage exceeding $50,000 that the Internal Revenue Code (“IRC”) treats as imputed income taxable to the employee. The WHD first cited the principle that “contributions irrevocably made by an employer to a trustee or third person pursuant to a bona fide [benefit] plan,” such as a life insurance plan, fall within a regular rate exclusion. 29 U.S.C. § 207(e)(4). The WHD ultimately advised that whether income is taxable under the IRC does not dictate excludability from the regular rate. Put another way, “[t]here is no presumption that income taxable under the IRC must be included in the regular rate.” The relevant inquiry is instead whether an employer’s contributions to a benefit plan satisfy the statutory and regulatory requirements under the FLSA.
The opinion letter mentions that in order to be excludable from the regular rate, 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 to the employees. See 29 C.F.R. § 778.215(a)(3).
The new opinion letters make clear that, even amid the exigent circumstances and legislative developments related to the current pandemic, the WHD remains committed to its responsibility of issuing interpretive guidance regarding the FLSA. Employers should watch for further guidance that may be forthcoming.