DOL Opinion Letters Address Whether Other Payments Must Be Included in the Employee’s Regular Rate

The U.S. Department of Labor released three new opinion letters on March 26, 2020, addressing whether certain payments – longevity bonuses, referral bonuses, and employer benefit contributions – must be included in the employee’s regular rate of pay for purposes of calculating overtime payments under the Fair Labor Standards Act. Opinion letters respond to a specific wage-hour inquiry to the DOL from an employer or other entity, and represent the DOL’s official position on that particular issue. Other employers may then look to these opinion letters for guidance.

The FLSA requires payment to non-exempt employees of an overtime premium for all hours worked over 40 in a workweek, at 1½ times the employee’s regular rate. The regular rate includes “all remuneration for employment paid to, or on behalf of, the employee,” subject to eight statutory exclusions. The DOL recently issued a final rule listing payments that could be excluded from the regular rate, which we discussed in our December 12, 2019 E-Lert. In announcing these opinion letters, the DOL stated, “All three of the opinion letters published today provide further clarity on the Department’s recently announced final rule on FLSA regular rate requirements, which allows employers to more easily offer perks and benefits to their employees.”

FLSA2020-3 – Longevity Payments. One of the statutory exclusions from the regular rate is “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.” Such payments may be tied to length of service. They may also be “paid with regularity so that employees are led to expect it.” But if the payment is made pursuant to contract, or if it is so substantial that it can be assumed to be part of the employee’s wages, then it is not a gift and is not excludable from the regular rate.

Applying these principles, the DOL found that longevity payments were made pursuant to a city resolution that provided that eligible employees “shall” be entitled to the award. Although the form and time of the payment were left to the City’s discretion, the fact of the payment was not. Thus, the payments were not in the nature of gifts, and must be included in the regular rate. The DOL observed that, had the resolution stated that employees “may” be entitled to longevity pay up to a maximum amount, leaving the actual amount up to City official to determine each year at Christmas time, such payments would have been authorized but not required, and therefore could have been excluded as gifts.

FLSA2020-4 – Referral and Longevity Bonuses. At issue here is the same statutory exclusion discussed above – “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.” In its preamble to the 2019 Final Rule, the DOL reaffirmed its longstanding principle that referral bonuses are not remuneration and therefore are not included in the regular rate if the following conditions are met: (1) participation in recruitment activities is strictly voluntary; (2) the recruitment activities do not involve significant amounts of time; and (3) the recruitment activities are limited to after-hours solicitation among friends, relatives, neighbors and acquaintances as part of the employee’s social affairs. Such payments would be in the nature of an excludable gift.

The situation in question involved a proposed referral bonus program available to employees who do not work in human resources and who have no responsibilities as to recruitment, hiring, selection or hiring. The program would be voluntary, require only the submission of a potential applicant’s name, and be limited to the employee’s after-hours social affairs. The payment, which would be “significant,” would be made in two installments – one at the time the referred employee is hired, and the second on the one-year anniversary of the hire, assuming both the referring and referred employees are still employed.

In applying the principles above to this situation, the DOL determined that the first installment could be excluded. Because the second installment would only be paid after a year, it is more properly characterized as a longevity bonus that rewards the referring employee for a year of service. The DOL observed that, if the second installment were to be paid regardless of whether the referring employee were employed or if the period of time was only a month rather than a year, then it would be more similar to the properly excludable first installment.

As a longevity bonus, in order to qualify for the exclusion that it is a “payment[] in the nature of gifts . . . as a reward for service”, the bonus must meet two conditions: (1) not be measured by hours worked, production or efficiency; and (2) not be paid pursuant to a contract. As noted in the prior opinion letter, if the payment is not contractually enforceable, it may be excluded from the regular rate, but it if is contractually enforceable, it must be included in the regular rate. While the payment met the first condition, the DOL found it unclear whether a contractual right to payment was created by the program.

FLSA2020-5 – Benefits Payments. The FLSA provides that “contributions irrevocably made by an employer to a trustee or third person pursuant to a bona fide [benefit] plan” may be excluded from the regular rate, if they meet certain requirements: the “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 employees’ benefits.

The DOL applied this analysis to an employer’s contribution to group-term life insurance coverage of over $50,000 for the employee, which was required to be reported as taxable gross income by the Internal Revenue Code. The DOL noted that imputed income that is taxable under the IRC need not necessarily be included in the regular rate; thus the treatment of income for tax purposes is not determinative of whether it must be included in the regular rate. Rather, the payment met the requirements for the statutory exclusion, and the amount of the payment was irrelevant to this analysis.