FLSA Opinion Letter: Additional Compensation and Regular Rate of Pay

The most recent Department of Labor (DOL) Fair Labor Standards Act (FLSA) opinion letter warns against excluding additional compensation in the regular rate of pay for overtime calculations.

The Situation

An oil and gas service company that employs field inspectors reported that they regularly reimburse inspectors for the use of personal cell phones, cameras, vehicles, safety equipment, tools, and other gear. On recent projects, the company paid inspectors $25 per day for use of such tools and equipment. The company asked if they could increase the tool and equipment payments to as much as $150 to $200 per day, and then exclude those payments from the regular rate of pay.

The FLSA requires that the regular rate of pay include “all remuneration for employment paid to, or on behalf of, the employee,” subject to statutory exclusions noted in DOL Fact Sheet #56A. Employers are permitted to exclude from an employee’s regular rate of pay “reasonable payments for traveling expenses, or other expenses, incurred by an employee in furtherance of the employer’s interests.”

In the opinion letter, the DOL pointed out that the proposed equipment payments are six to eight times higher than the current reimbursement and that the employer gave no indication that inspectors actually incur such significant ongoing expenses. They further said that “reimbursement payments cannot be used to artificially reduce employees’ regular rates of pay, in an attempt to reduce the amount an employer must pay its employees for overtime work. The FLSA does not permit schemes of this kind.”

Best Practices

From a compliance perspective, the best practice is to pay all nonexempt staff market-competitive hourly pay rates and refrain from adding additional payments. However, when that is not possible, employers must ensure that additional compensation is included in the regular rate of pay.

Additional Compensation in Schools

Examples of additional compensation that must be included in the regular rate calculations are:

• Bonuses awarded for attendance, performance, or retention
• On-call pay
• Salary increases, including retroactive pay raises
• Longevity pay
• Stipends for extra work, such as coaching
• Employer contributions to “cafeteria” plans, health insurance, etc., if the employee has a choice of receiving the contribution, in whole or in part, as direct compensation

Examples of allowable exclusions from the regular rate calculation are:

• Reasonable travel expense reimbursements
• Reasonable uniform allowance
• Pay for time not worked (paid leave)
• Discretionary bonuses where both the payment and the amount are not pursuant to any prior agreement – note that these are uncommon in educational entities because compensation is approved by the board
• Overtime pay

Reminder

Calling a payment a “reimbursement” or a “discretionary bonus” does not make it excludable from the regular rate of pay. The facts and circumstances surrounding the payment determine whether or not it is excludable.

More information about the regular rate of pay can be found in the following HR Services resources:

• FLSA Regular Rate of Pay, Premium Pay, and Additional Payments
• Q&A: FLSA and the Regular Rate of Pay
• Recorded webinar: Calculating Overtime for Nonexempt Employees (member login required)