Tuition reimbursement, gym memberships, and the occasional unexpected bonus aren’t all that unusual for today’s salaried employees. But it may soon be easier for employers to extend those benefits to their hourly workers, too.
In March, the Department of Labor (DOL) announced a proposed update to the Fair Labor Standards Act (FLSA) that would clarify what benefits should be included in an employees’ regular rate of pay—which is used to calculate an employee’s overtime pay.
What’s the issue?
Right now, the FLSA requires several benefits to be included in an employee’s regular rate of pay, and those rules can discourage employers from offering those benefits to their hourly employees.
Why? Because those benefits would inflate the amount the employers are required to pay in overtime.
For example, if your employees are making $20 an hour but your company provides additional perks, the current law requires you to come up with a complicated math problem to determine the value of some of those benefits and how they should be included in your team’s regular and overtime rates.
“Under the law, the business is supposed to take into account the value of those other benefits and, in some way, shape or form, add that value into their regular hourly rate and, among other things, calculate overtime and benefits off of that,” says David Lewis, president and CEO of Connecticut-based OperationsInc, a human resources outsourcing and consulting practice.
But, says Lewis, it’s worth noting that few companies take the time to make those calculations. And, he adds, “it is not a common practice that is enforced by the Department of Labor, which is even more important.”
How would the regular rate of pay change?
As of now, the regular rate of pay includes a worker’s hourly wages and the value of other employer payments such as “board, lodging, and other facilities,” according to the DOL.
If approved as proposed, the new rule would let employers exclude seven kinds of benefits from an employee’s regular rate of pay to reduce the number of calculations (and overtime pay) employers are on the hook for.
| Benefit | What’s changing |
| Wellness programs | Onsite specialist treatments, gym access and fitness classes, and employee discounts on wellness products and services would be excluded as part of the proposal. |
| Payments for unused paid leave | Paid sick leave that an employee never took would not have to be part of their regular rate of pay. |
| Reimbursed expenses | The definition of “reimbursed expenses” would broaden to include payments that are not ”solely” for the employer’s benefit, as the law now states. They might cover, for example, reimbursement for meals employees order at the office, according to Zachary Busey, a Memphis-based lawyer with Baker Donelson who specializes in employment law. In that case, both boss and worker would benefit. The employee would enjoy a free lunch and the employer wouldn’t have as many employees taking long lunch breaks. |
| Reimbursed travel expenses | These would be excluded as long as they satisfy other requirements, such as not exceeding the maximum travel reimbursement allowed by the Federal Travel Regulation. |
| Discretionary bonuses | Examples would be bonuses for employees of the month, employees who make extraordinary efforts, severance, overcoming stressful or difficult challenges, and similar payments that weren’t promised in advance. |
| Benefit plans | FLSA already nixes an employer’s payments for retirement, life insurance, and health plans from a worker’s regular rate. This latest proposal would add insurance for unemployment and legal services to the list of exclusions. |
| Tuition | Reimbursement programs and student loan repayments would be excluded from the regular rate of pay calculations. |
The proposal also tackles the issue of call-back pay, which is money given to employees who are called in at short notice to fill a shift. If the rule passes, those payments no longer have to be “infrequent and sporadic” to be excluded from an employee’s regular rate of pay. They just can’t be so regular that they are “essentially prearranged,” according to the DOL.
More than a paycheck
While the issue isn’t something employers may be grappling with on a daily basis, Busey says the proposal reflects dramatic shifts in the workplace since the rules were written 50-plus years ago.
Today’s employees, especially millennials and Generation Z workers, no longer expect just a paycheck and the standard perks of health insurance and a 401(k) plan from their employers.
One Gallup poll found that millennials were more likely than Gen Xers and baby boomers to leave their current job for a new one that offered reimbursement for student loans, tuition, and child care. While those kinds of perks have been available to the C-suite and salaried workers for years, workers at all levels are now demanding them.
“The workforce wants more flexibility and they want perks,” Busey says. “…I don’t [just] want to know what my hourly rate is going to be. I want to know what my quality of life is going to be. I want to know what the workplace is going to be like.”
And, he says, the proposal also comes as the DOL considers another change for hourly workers that would boost the salary level from $455 per week to $679 per week for employees who are considered exempt from earning overtime pay.
If that proposal is passed, an estimated one million workers or more will move from salaried to hourly, according to the DOL. And in many cases, says Busey, those new hourly workers will be lower level managers and supervisors. Now, if the regular rate rule change also passes and these perks are excluded from overtime calculations, employers can more easily offer those workers extra benefits.
Employers can then have conversations with their new hourly employees that might go like this, says Busey: “You’re going to be paid hourly, but we still have perks to offer you. We still have some of that C-suite feel, that exempt feel, to our compensation package.”
What should a small business owner do?
Don’t make promises
This is still just a proposal, and it could take months or years, if it’s legally challenged, to become law.
“This is promising, especially for small businesses and startups that need a lot of flexibility,” Busey says. “It’s something to continue to monitor. I would not be out there promising compensation packages to hourly employees. We’re not there yet.”
Do an internal employee audit
Take a hard look at your workforce now to ensure that each team member is correctly classified as either a salaried (or exempt) employee or an hourly (or non-exempt) worker.
Remember: Exempt employees must meet requirements for both salary and on-the-job duties.
“You need to look closely at what their roles are and make sure that you are properly compensating them,” Lewis says. “The biggest issue that we see in supporting over 1,000 companies is that a large percentage… do not understand this law and/or are openly choosing not to comply with the law.”
Be mindful when you extend benefits
“When we add in flexibility and options, we have more opportunities to make a decision that creates legal exposure,” Busey says. “And so we have to be mindful of being uniform.”
That might include drafting policies to ensure that all workers, not just a certain gender or race, get call-back pay when they come in to cover a shift or that a clothing allowance for a uniform is extended to all, not just one gender.
Stay tuned for more information here about the latest on the proposals and how they could affect your small business.
