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Policy Innovation or Pandora’s Box? The Department of Labor Considers Revising Pay Calculations in 2018 Regulatory Agenda

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The Department of Labor (DOL) surprised many observers by announcing it would issue a new proposed rule on calculating the “regular rate of pay” for determining overtime wages in its recently issued 2018 regulatory agenda. The DOL has only stated that it intends to “clarify, update, and define regular rate requirements” for the Fair Labor Standards Act, and that the proposed rule will be issued in September 2018.

This change could mean that the DOL is either planning to revise its regulations to exclude more forms of compensation from pay calculations, or that they plan to broaden the types of compensation that are included. Either path may present challenges for employers.

Under current law, the DOL excludes from an employee’s “regular rate of pay” certain types of compensation that are not based on the employee’s hours of work, such as vacation pay or paid time off, reporting pay, on-call pay, and travel expense reimbursement. How the regular rate is calculated makes a significant difference for purposes of calculating overtime, because it is the DOL’s broader “regular rate of pay” definition that determines the proper overtime rate.

As employers provide a broader variety of benefits and compensation to employees apart from straight hourly wages or salaries, calculations for determining overtime rates have become more complex. Many employers now contend with costly, time-consuming class action and collective action cases based on whether the overtime rate was properly calculated. Changing the regular rate of pay calculation could either simplify the issue, by reducing the types of compensation that must be included in the regular rate, or make overtime determinations more complex by adding other forms of benefits and compensation to employees into the mix.

A simple example shows why employers should pay close attention to proposed changes to the regular rate of pay standard. Say an employee is paid $20 per hour for non-overtime hours, works 45 hours a week, and receives $600 per week in reimbursed travel expenses. Under current law, the employee’s regular rate of pay is $20 per hour and the overtime rate is $30 per hour. However, if travel expense reimbursement is added into the regular rate, the regular rate becomes $33.33 per hour and the overtime rate is $50 per hour. Multiplied across an entire year for all nonexempt employees, the costs quickly add up.

Adding to the potential complexities, many states have taken an increasingly diverse approach to wage issues. For instance, California’s Supreme Court recently held that the regular rate under California law is broader than federal law. Other states, such as New Jersey, increasingly require employers to pay for reporting and on-call time. If the DOL’s new rule further diverges from state standards, compliance could become more complicated.

Because regular rate calculations have the potential to dramatically change a business’s labor costs, employers should carefully review the new proposed rule when it is issued in September 2018.