After much anticipation, the Department of Labor (“DOL”) has issued its final rule clarifying the regulations governing calculation of the FLSA regular rate of pay, 29 CFR sections 548 and 778. The Department last updated these rules more than 60 years ago, before the FLSA applied to public agencies.
For years, public agencies have been forced to apply these outdated regulations aimed at private sector workers to the public sector workforce. This task has been akin to fitting a square peg into a round hole due to the unique and complex compensation programs provided by public agencies, which often include multiple types of specialty and incentive pay.
Despite the awkwardness and ambiguity of the prior regulations, until very recently, courts have interpreted DOL’s regulations narrowly in favor of employees, construing any ambiguity in the law in favor of the employee. As a result, public employers have faced myriad regular rate lawsuits in recent years. Due to this fact, and the FLSA’s mandatory attorneys’ fee provisions, public employers are often faced with the unsavory decision of taking up an expensive legal battle, or cutting losses and settling a case, even where liability is unclear.
The DOL’s final rule, which spans forty pages in the federal register, take into consideration the recent U.S. Supreme Court guidance in Encino Motorcars, LLC, v. Navarro, 138 S. Ct. 1134 (2018), which holds that provisions of the FLSA must be given a fair—rather than a narrow—interpretation, and addresses many of the common regular rate issues faced by public employers. Not all of DOL’s guidance favors employers, but the new regulations do provide some much-needed clarity to the previously ambiguous regulations.
Below are some of the highlights from the final rule most relevant to public agencies:
- Medical Cash-in-Lieu Included in Regular Rate.
The Department agreed with the Ninth Circuit’s holding in Flores v. City of San Gabriel, 824 F.3d 890, which held that cash payments made as part of an employer’s medical cafeteria plan must be included in the regular rate of pay. The DOL reasoned that these payments are made directly to employees and not “by an employer to a trustee or third person” as required under Section 7(e)(4) of the FLSA.
- Holiday-in-Lieu Pay Excluded from Regular Rate.
Many public employers provide pay “in lieu” of having a fringe benefit of a paid holiday schedule. For example, many public safety employees work a set schedule, where they are scheduled to work some days designated as holidays by their employers, but will have other days off, depending on their particular shift schedule. Section 7(e)(2) of the FLSA excludes from the regular rate “payments made for occasional periods when no work is performed due to vacation, holiday, illness, failure of the employer to provide sufficient work, or other similar cause.” Despite this language which suggests that these ‘Holiday-in-lieu” payments are excluded from the regular rate, multiple federal courts in California previously held that such holiday-in-lieu pay needs to be included in the regular rate of pay. See, e.g., Hart v. City of Alameda, 2009 WL 1705612 (N.D. Cal. June 17, 2009); Lewis v. County of Colusa, No. 2:16-cv-01745-VC, 2018 WL 1605754 (E.D. Cal. Apr. 3, 2018); McKinnon v. City of Merced, No. 118-cv-01124-LJO-SAB, 2018 WL 6601900 (E.D. Cal. Dec. 17, 2018). Some of these adverse opinions struggled with what it means to be “due to” a holiday under FLSA section 7(e)(2) and determined that a payment is not due to a holiday unless it is made in the same pay period in which the holiday falls, while others suggested that an employee does not “forego” a holiday under section 7(e)(2) where the employee’s schedule requires them to work a holiday.
The DOL rejected the reasoning of these decisions and clarified that “it does not matter whether the employee voluntarily foregoes the holiday to work or is required to work the holiday by the schedule set for the employee” and that “such payments may be excluded whether paid out during the pay period in which the holiday or prescheduled leave is foregone or as a lump sum at a later point in time.”
- Call-Back and Other Similar Pay Need Not Be “Sporadic” or “Infrequent”.
Many public employers provide employees call-back pay, where the employer pays an employee for a guaranteed number of hours at the employee’s straight time or overtime rate when the employer calls the employee back to work outside regular work hours, or in other similar situations. The prior regulations specified that callback and other similar pay that was not actually worked by the employee need not be included in the regular rate provided the payments were “sporadic or infrequent.” The new regulations omit the “sporadic or infrequent” requirement, suggesting a broader reading of the exemption.
The calculation of the FLSA regular rate remains a complex and fact-intensive inquiry, which will depend on an employer’s individual pay practices and policies. The above information is only an overview and you should consult with an attorney to ensure you are properly calculating the regular rate. However, these new regulations provide some needed guidance that will hopefully make it easier for public employers to comply with the FLSA’s requirements. Now is a good time for employers to consider a payroll audit to ensure they are properly calculating FLSA overtime.