I have blogged about some USDOL initiatives of late and see they are picking up some momentum with further developments coming down the line. The agency is going to revise the manner in which overtime is calculated (maybe to the employer’s benefit) and speak more on the issue (thorny as it is) of inclusion of bonuses in the regular rate.

U.S. Department of Labor headquarters
By AgnosticPreachersKid (Own work) [CC BY-SA 3.0], via Wikimedia Commons
There are other forms of “compensation” for employees, such as employee discounts and referral fees. The issue of whether these items are includible in the regular rate may also be opined about.  As I blogged about, the regulatory Agenda specifically stated that it would “clarify, update, and define regular rate requirements.” No other details have been forthcoming.

There is consensus that the new regulations would establish new groups of payment that may be excludible from the regular rate for overtime which businesses would welcome. There are any number of non-economic incentives and “payments” that are not directly amenable to computation and should (or should not) be includible.

Mr. Alexander Passantino, a former Wage-Hour Division Chief has observed that “it would be nice to have more guidance on what you’re talking about there so that we could give clients more advice on that with more certainty. Clients come up with good ideas on how they want to reward employees. It’s just helpful to say, ‘Yeah, that’s going to impact overtime rate,’ or, ‘no, it’s not.’”

The Takeaway

I agree with that sentiment. Employers want to comply with the law and often times have difficulty in properly interpreting what the FLSA does/does not command.  We will see what happens to the definition of the “regular rate” and what items it will/will not include.

I can’t wait…  .

The Trump Administration has issued its regulatory agenda, which is a semi-annual statement of the short- and long-term policy plans of government agencies. The DOL is at the forefront of these changes to come. The agency stated that it will revise the definition of “regular rate,” the number that forms the basis for overtime computations this coming September.

A former lobbyist for the Chamber of Commerce applauded the DOL proposed initiative on the regular rate and called it “huge.” The Fair Labor Standards Act mandates that employers calculate the regular rate for overtime purposes and there are many scenarios in which bonuses and other incentives are required to be included when determining what the regular rate is for a particular week. If these bonuses and other incentives did not need to be included, that would be a watershed development in how overtime is calculated and would reduce employer overtime liability significantly.

U.S. Department of Labor headquarters
By AgnosticPreachersKid (Own work) [CC BY-SA 3.0], via Wikimedia Commons
I have handled FLSA class actions where a client, through inadvertence, did not include small bonus amounts for employees and the end result was a major class action that we eventually settled but it was a real problem. The point is that many employers, good faith, well-intentioned employers, are simply unaware of these rules though they are certainly not trying to “stiff” their employees.

Another proposal in the agenda, rather controversial, is to expand apprenticeship and job opportunities minors under eighteen by softening the rules that forbid minors from working in so-called “hazardous” occupations or working around machinery that is prohibited. One advocate for workers agreed with the goal of increasing work chances for young people but urged the agency “to proceed with caution.” The advocate stated that “the DOL has a responsibility to safeguard the health and well-being of all workers, especially children.”

The Takeaway

The regular rate revision or change excites me from an “intellectual” side and, more germanely, from a practitioner’s perspective. That entire issue is very misunderstood by the employer community and can often lead to major liability. On a weekly basis, the tiny amounts generated from an employer’s failure to include bonus monies is negligible. However, when those tiny amounts of money are combined for a class of employees over two (or three) years, then the liability may become astronomical.

Maybe this new proposal is the right fix…

There have been many class actions concerning the job title “Assistant Manager” and this malady has risen again.   The chain, Hooters, has been sued in a nationwide collective action that alleges the Company misclassified assistant store managers, calling them supervisors, in order to avoid paying overtime.  The case is entitled Stirewalt et al. v. Hooters of America LLC and was filed in federal court in the Northern District of Alabama.

Hooters Restaurant
By Ildar Sagdejev (Specious) (Own work) [GFDL or CC BY-SA 4.0-3.0-2.5-2.0-1.0], via Wikimedia Commons
The named plaintiffs allege that they worked up to eighty (80) hours per week but were never paid overtime due to their misclassification.  The claim they only had the title of Manager, but that their main duty was sales and not the supervision of at least two other employees, over whom they could exercise managerial authority.  They claim that when they did create schedules, they were “almost always changed,” according to the Complaint.  They claim that although they interviewed new job applicants, the recommendations they made were often ignored by their supervisors.

More significantly, the Complaint alleges fraudulent conduct by the Company. It alleges that the “defendants have intentionally and repeatedly misrepresented the true status of managerial compensation … to avoid suspicion and inquiry by employees regarding their entitlement to monies owed to them.  Plaintiffs, as well as other similarly situated present and former employees, relied upon these misrepresentations by defendants and [were] unable to determine [their] true status under the FLSA by the exercise of reasonable diligence because of those misrepresentations.”

The plaintiffs want notices to be sent to current and former assistant managers who worked at a Hooters store within the last three years.  This would allow these workers to opt in to the collective action.  The plaintiffs seek overtime, commissions, bonuses, vacation and sick time and, naturally, attorneys’ fees.

The Takeaway

I don’t mind these so much.  (Famous last words?)  These kinds of actions usually necessitate an individualized determination of the duties of the various employees and that is the death knell of a viable class action.  The problem is if they were subject to the same, uniform, system-wide policies, that would be bad.  But, at least from the start the defendant here has a legitimate, viable chance of defeating the motion(s) for class certification.

A little known aspect of the FLSA is the need for an employer to include non-discretionary bonuses when calculating the regular rate for purposes of overtime calculation.  In a collective action, the employees of Publix Super Markets have charged that the Company has not done that, particularly in the face of an alleged admission by the employer that the bonuses were nondiscretionary.  The case is entitled White et al. v. Publix Super Markets Inc. and was filed in federal court in Tennessee.

The Company had filed a motion for summary judgment asserting that the quarterly profit sharing bonus paid to hourly employees, the Christmas bonus, paid time for six holidays and tuition reimbursement did not warrant inclusion in the OT rate.  The Company charged that the plaintiffs mislabeled the manner in which the employee bonuses were actually calculated and that, in fact, the payments were within the law.

The workers fired back, contending that the Company had gone on record conceding that the payments were nondiscretionary and that the payments conflicted with DOL regulations.  The Company rebutted by contending that the bonus already provided “simultaneous payment of overtime compensation due on the bonus.” The Company asserted that the bonus was calculated based on number of hours employees worked at their store during the relevant period and thus fell within the safe harbor of percentage bonuses.  If a bonus is computed as a percentage of total employee earnings, then under USDOL regulations, it is legal.   The Company asserted that the USDOL had already concluded that the bonus did not need to be included into the OT calculation based on this percentage calculation.

The workers countered by asserting that the DOL’s “longstanding interpretation” of the total earnings requirement for rendering a bonus excludable from the regular rate was that the retail bonus had to be included because they were remuneration for employment and not just expense reimbursements, the Company could not exclude those payments from the regular rate.

 The Takeaway

Bonuses (or whatever they are called) must be included in the regular rate, if they part of a policy, practice or custom and employees expect such bonuses.  Truly discretionary bonuses are rare animals, i.e. the Christmas bonus, but a way to defend such an allegation is to build into the bonus “program” that the giving of such bonuses is contingent on, for example, “budgetary concerns.”

With that said, if the plaintiffs in this case can show that the payments at issue were given as payments for some employment related activity, as opposed to, for example, a paid sick day where no employment activity is engaged in, they might have a case.

Under the FLSA, bonuses are excludable from the regular rate only if the employer can affirmatively demonstrate that the bonus fits into a specific statutory exclusion. In order for a bonus payment to be excluded it must be discretionary, which requires that the bonus meet all of the following requirements:

  1. The employer must retain discretion as to whether the payment will be made;
  2. The employer must retain discretion as to the amount of the payment;
  3. The employer must retain discretion as to the payment of the bonus until near the end of the period which it covers; and
  4. The bonus must not be paid pursuant to any prior contract, agreement or promise causing the employee to expect such bonus payments.

Under this test, bonuses that are announced to employees to induce them to work more steadily, rapidly or efficiently, or to remain with the employer, must be included in compensation. Similarly, bonuses which are intended to reward specific behavior, such as attendance bonuses, individual or group productivity bonuses, bonuses for quality and accuracy of work, bonuses conditioned upon continued employment, or bonuses “promised to employees upon hiring” must be included as compensation.

A bonus paid pursuant to any prior “contract, agreement or promise” is not excluded. Bonuses that are not discretionary must be totaled in with other earnings and used to determine the hourly rate on which overtime is based.

For example, if a company provides a plan whereby employees will share monies in the event that company performance reaches certain goals, that bonus income will affect the regular rate/overtime computation for non-exempt employees. Such a Plan does not provide the requisite discretion to meet the regulatory requirements. There is no explicit reservation of discretion concerning the giving of the bonus.

Rather, it is contingent upon the level of Company performance and the level of individual performance. The Company performance contingency relates to sales and expenses; the employee performance contingency relates to an objective/subjective assessment of performance. Under the FLSA regulatory framework, such contingencies do not establish the requisite discretion to permit exclusion from the computation of the regular rate for overtime purposes.

This may not seem like a big deal, but if the DOL uncovers this relatively minor violation (depending on the amounts involved), it may be more inclined to dig deeper into the employer’s compensation practices and possibly find other more significant violations that were lurking beneath the surface. If the employer, however, builds into the bonus program the retention of some element of discretion, this may yet be a way to avoid the inclusion of the bonus into the regular rates of employee wages, with the accompanying extra overtime required to be paid.

On May 9, 2011, the United States Department of Labor (“DOL”) announced the launch of an application for the iPhone and iPod Touch that will record the hours worked by employees and the wages they are owed.  The application will be available in English and Spanish and will allow users to record their regular work hours, break time, and overtime hours for more than one employer.  The application will also enable users to view a summary of their work hours and email the summary of work hours and pay as an attachment.

According to the DOL, “this new technology is significant because, instead of relying on their employers’ records, workers now can keep their own records.”  The DOL has further provided that “this information could prove invaluable during a Wage and Hour Division investigation when an employer has failed to maintain accurate employment records.”

The DOL is currently exploring making the application available for other smartphones such as BlackBerry and Android.  Additionally, the DOL has stated that it intends to update the application to include wage and hour issues not currently provided for, such as tips, commissions, bonuses, deductions, holiday pay, pay for weekends, shift differentials and pay for regular days of rest.

The DOL’s launch of this application only further highlights the need for employers to keep accurate time and payroll records for employees.  Up to now, employees typically contested the records maintained by employers with nothing more than their opinion and recollection of events. This application, however, should enable employees to challenge the calculation of their pay with detailed records and notes.

There had been an initiative to change the regulations regarding the fluctuating work week (“FWW”) computation of overtime found in 29 CFR 778.114 by allowing the payment of non-overtime bonuses and incentives without invalidating the guaranteed salary criterion required to allow an employer to pay half-time overtime under the formula set forth in the regulation.

There was opposition to this.  The opposition took the view that this change would allow employers to reduce employee fixed weekly salaries and shift the bulk of the employee compensation to bonus and premium pay.  These commenters believed that the change would lead to significant variations in weekly wages based on hours worked and that such variations were inconsistent with the concepts behind the fluctuating work week method of compensation.

The US Department of Labor accepted the view of these opponents, or perhaps, was afraid to make the changes that the new times in which we live might have commanded.  The agency concluded that such incentive and bonus payments were incompatible with the FWW procedure.  The agency feared that the change could have induced employers, intentionally or not, to shift a large portion of employee compensation to such bonus payments, potentially resulting in wide disparities in employees’ weekly pay depending upon the number of hours that they worked in a given week.  Thus, other than changing the example in the current regulations to comport with the new minimum wage, the regulation has been left unchanged.

I believe the DOL missed an opportunity to bring this longstanding regulation into the 21st Century.  It is a widespread truism that non-exempt employees are receiving bonuses and other premium-type payments in addition to their salaries and these incentive elements are becoming more and more accepted by employees as components of their compensation.  In my view, it would have been logical and consistent to permit such payments under the FWW compensation method.

I guess the DOL was afraid that the employer community would seize upon such a change as a “new”  way to hurt their employees.  In my practice, I deal with employers all of the time and I have more faith in the employer community, i.e., there is by no stretch of the imagination the malevolent intent  to use a DOL regulation to hurt people.  Simple as that.

A federal judge has conditionally certified a FLSA collective action which was instituted by a production workers in an action in which the plaintiffs claim that many kinds of payments were not included when the company calculated their overtime.  There were lump sum payments, flexibility payments for working during certain operational contingencies, various night work premiums, holiday premium pay and annual payments for certain employees when they renewed their licenses.

Production bonuses or other promised payments must be factored in when paying overtime to non-exempt employees.  Unless a bonus or other kind of payment is not dependent on the occurrence of a particular event (e.g. attaining ten years of service/longevity) and is given completely at the whim of the employer, these payments increase the regular rate.  They must be allocated over the period of time (week, quarter, annual) that in which the bonus has been earned and then overtime paid accordingly.

When the payments are promised to employees in company policies or documents, the Fair Labor Standards Act is even clearer and more emphatic that they be included in the calculation of the regular rate.

Although these calculations add in very little to labor costs on a week-to-week basis, if they are not undertaken, then the potential liability should a lawsuit ensue may conceivably escalate quickly.  This is because it is likely that many employees are subject to the same policy and these smallish weekly amounts, when multiplied by (perhaps) several hundred employees over two or three years (the possible statute of limitations in a FLSA action) become an amount that may be daunting.