Amendments to FLSA Regulations To Take Effect on May 5, 2011

May 4, 2011


On April 5, 2011, the Department of Labor’s Wage and Hour Division (“DOL”) published final revisions to regulations under the Fair Labor Standards Act (“FLSA”), as well as commentary explaining the DOL’s reasoning for adopting proposed amendments to the FLSA while rejecting others. The proposed rule was originally published in the Federal Register on July 28, 2008. The final rule, effective on May 5, 2011, addresses what appeared to be gaps in the regulations regarding overtime, fluctuating workweeks, and recordkeeping, among other subjects. Accordingly, rather than imposing new requirements on employers, the final rule mostly offers clarifications of existing rules and updates demonstrative examples with dollar figures more in line with the current minimum wage. These new changes to FLSA regulations affect private and public employers in various industries, but perhaps more noteworthy is the DOL’s rejection of several Bush-era proposals that were favored by employers and lobbied against by unions and employee advocates. The following is a summary of the key proposals of general interest to employers that the DOL adopted or rejected.

For private employers, the final rule amends several FLSA regulations affecting tipped employees, tip pools, and tip-credits. The final rule clarifies that: (1) “tips are the property of the employee, and that section 3(m) sets forth the only permitted uses of an employee’s tips—either through a tip credit or a valid tip pool—whether or not the employer has elected the tip credit”; (2) the FLSA does not impose a maximum contribution percentage on valid mandatory tip pools, which can only include those employees who customarily and regularly receive tips; (3) the FLSA requires employers to notify employees of any required tip-pool contribution amount; and (4) employers may take the tip credit only for the amount of tips each employee ultimately receives.

Additionally, the final rule makes non-substantive changes to the tip-credit provision, which permits employers to pay a tipped employee less than minimum wage as long as that wage and the employee’s tips are at least equal to the minimum wage. The final rule simply reflects the recent increase in the federal minimum wage to $7.25 per hour and accordingly adjusts the tip credit amount permissible under this provision. Specifically, the final rule increases the maximum tip credit to $5.12 per hour, but it leaves unchanged at $2.13 per hour employers’ minimum cash-wage obligations to tipped employees.

Moreover, the final rule excludes stock options from the computation of the regular rate of pay, bringing the FLSA regulations in line with FLSA amendments Congress enacted with passage of the Worker Economic Opportunity Act of 2000. Congress had amended the FLSA in 2000 to add to the types of remuneration that are excluded from the regular rate “[a]ny value or income derived from employer-provided grants or rights provided pursuant to a stock option, stock appreciation right, or bona fide employee stock purchase program” that meet certain criteria. This prohibits employers from counting stock options towards the minimum wage or overtime pay. The DOL’s final rule simply incorporates this statutory exclusion into the FLSA regulations. While the DOL just restated the statutory language, it left open the possibility that it will consider further guidance to clarify issues such as how an employer must communicate to employees the terms and conditions of stock option benefits and when employees can exercise a stock option in less than six months.

Another clarification affecting private employers involves the “youth opportunity” wage provision. The final rule amends FLSA regulations to conform with the pre-existing statutory provision that allows employers to pay an hourly “youth opportunity” wage of $4.25 per hour to employees younger than 20 years old in the first 90 calendar days of employment. The final rule also affirms that employers are prohibited from displacing employees—including reducing hours, wages or benefits—in order to hire workers at the lower youth opportunity wage.

Out of all the proposals the DOL rejected, four proposals stand out. First, the DOL rejected a Bush-era proposal to amend the regulations of the fluctuating workweek method of calculating overtime to expressly make this method compatible with the payment of non-discretionary bonuses to non-exempt salaried employees. The current regulation provides that employers may use the fluctuating workweek method for computing halftime overtime compensation if (1) the employee works fluctuating hours from week to week; (2) the employee receives a fixed salary that remains the same no matter how little or how many hours the employee works in a given pay period; and (3) the employee has a mutual understanding with the employer that the fixed salary is intended as straight-time compensation for all hours worked by the employee, regardless of the number of hours. Where there is such mutual understanding, employers satisfy the FLSA’s overtime requirements if they compensate the employee, in addition to the fixed salary, at least one-half of the regular rate of pay for the hours worked in excess of 40 hours in each workweek. Because the employee’s hours fluctuate from week to week, the regular rate would be determined separately each week based on the number of hours actually worked.

The proposed rule would have stated that bona fide bonus or premium payments would not invalidate the fluctuating workweek method, but that such payments must be included in the calculation of the regular rate unless they are excluded by other FLSA sections. The final rule, however, rejected this proposal, which employer groups advocated in public comments submitted to the DOL. The DOL explained that bonuses are incompatible because the rationale for allowing the fluctuating workweek method in the first place hinges on a mutual understanding between employer and employees that the fixed salary constitutes all straight-time compensation. Non-discretionary bonuses are at least in part additional straight-time compensation, which means an agreement that the employees had already been paid all straight time compensation could not have existed.

The DOL also appeared to agree with employee groups that pointed out the proposed language “would permit employers to . . . shift the bulk of the employees’ wages to bonuses and premium pay,” thereby leading to “significant variations in weekly wages based on hours worked”—a result inconsistent with the “purpose of the fluctuating workweek.” In rejecting the proposal, the DOL nevertheless acknowledged that “[p]aying employees bonus or premium payments for certain activities such as working undesirable hours is a common and beneficial practice for employees.” (As an aside, employers who have been following the ongoing battle in the federal courts regarding whether the fluctuating workweek analysis applies in misclassification cases should note that the DOL explicitly states that the regulation is intended to apply to “salaried nonexempt” employees—not employees exempt from overtime requirements.)

Second, the DOL rejected a proposal to amend the meal credit provision. The FLSA permits employers to count the reasonable cost of a meal provided to an employee toward that employee’s minimum wage. The proposed rule would have amended FLSA regulations to allow employers to apply a meal credit even where the employee did not voluntarily accept the meal. The DOL rejected this change, citing concerns of dietary or religious restrictions that would prevent employees from eating employer-provided meals and the practical implication of whether enough time is allocated for employees to eat.

Third, the DOL declined to clarify the conditions or factors affecting an employer’s obligation to compensate employees for time spent commuting in an employer-provided car. The proposed rule would have added examples to the FLSA regulations to demonstrate situations where commuting from home to work in an employer-provided car would not be considered part of the employee’s principal activities and therefore not compensable time. In declining to adopt these examples, the DOL reasoned that whether commute time is compensable varies by circumstances and, thus, must be examined on a case-by-case basis. The DOL left open the possibility that it will consider further “non-regulatory” guidance on issues such as commuting distance, costs, and incidental activities.

While the DOL rejected the proposal to clarify circumstances where commute time may be compensable, the final rule adds language to the FLSA regulations that replicates verbatim an amendment to the FLSA pertaining to employer-provided vehicles that Congress enacted as part of the Employee Commuting Flexibility Act of 1996. This amendment provides, in part, that use of an employer-provided car is not compensable if such use “is within the normal commuting area for the employer’s business or establishment and . . . is subject to an agreement” between employer and employee or employee representative. The DOL reasoned that adding this language, though it does not substantively change the current state of the law, was necessary to make the FLSA regulations consistent with existing statutes.

Fourth, the DOL declined to clarify whether and how service advisors working for dealerships can qualify for an overtime exemption under the FLSA. The pertinent exemption here is one that exempts from overtime requirements certain salespersons, partspersons and mechanics who are “primarily engaged in selling or servicing automobiles, trucks, or farm implements.” Current FLSA regulations, however, state that employees described as service advisors, service managers, service writers or service salesmen who are “not primarily engaged in the work of a salesman, partsman or merchanic” do not qualify for this exemption. The proposed rule would have clarified that employees selling services for cars, trucks or farm implements fall within this exemption. While the DOL rejected this proposal, it noted that the proposal was intended to follow the holdings of three appellate courts that held that employees performing the duties typical of service advisers are exempt from overtime because they are “salesmen” primarily engaged in servicing automobiles. The DOL acknowledged that such employees can be exempt, but it explained that specifically listing these positions as exempt would be problematic as there are circumstances where the requirements for the exemption would not be met.

Finally, the new FLSA regulations address other issues that are not discussed above. For example, the final rule:

  • conforms the FLSA regulations affecting agricultural workers on water storage/irrigation projects with the 1997 Departments of Labor, Health and Human Services, Education, and Related Agencies Appropriations Act;
  • amends regulations pertaining to volunteers at private non-profit food banks to include exemptions enacted by the Amy Somers Volunteers at Food Banks Act of 1998;
  • changes the regulatory definition of an “employee . . . in fire protection activities” to make it consistent with the same definition in a 1999 amendment to the FLSA; and
  • updates the regulations with “technical amendments” to reflect the latest increase in the minimum wage and other outdated threshold amounts, and eliminates outdated references to former minimum wage rates.

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