The regular rate exclusions: employee benefit plans

I sat here and thought about how to make employee benefits entertaining. Or funny. Anything to make people actually read a post about how to structure employee benefits plans so they are excludable from the regular rate under the Fair Labor Standards Act. Unfortunately, I’m a lawyer, not a comedian, so you are just going to have to bear with me on this one.

Most employers provide some kind of benefit program to their employees – as the statute puts it, to “[c]ontributions irrevocably made by an employer to a trustee or third person pursuant to a bona fide plan for providing old-age, retirement, life, accident, or health insurance or similar benefits for employees” 29 CFR §778.200(a)(4). The regulations specify that it does not matter how the plan is financed and whether employees contribute to the plan, but if the plan is combined with a profit sharing program, it must also meet the requirements for employer contributions to profit sharing programs to be excluded from the regular rate. 29 CFR § 778.214.

As you might have expected, there are some rather specific requirements for whether payments to employee benefit plans may be excluded from the regular rate, just like there were for profit sharing plans and stock options grants. Again, if these are all just too much for you, you don’t have to go it alone here. Just call one of the many skilled employee benefits attorneys here at good old WNJ and they (we) can help.

Number one, contributions to the benefits plan must be “made pursuant to a specific plan or program adopted by the employer, or by contract as a result of collective bargaining, and communicated to the employees.” 29 CFR § 778.251(a)(1). That sounds easy enough – create a plan or program, and don’t keep it a secret.

Number two, the purpose of the plan must be “to provide systematically for the payment of benefits to employees on account of death, disability, advanced age, (something Steve is rapidly approaching), retirement, illness, medical expenses, hospitalization, and the like.” 29 CFR § 778.215(a)(2). The way the regs put it sounds a little doom and gloom to me, but it’s the standard stuff of employee benefits: life insurance, disability insurance, health insurance, and retirement planning.

Number three, the regs give you several options on how to determine the contributions and benefits to the plan. We are just going to cover the basics here. The first option is for the plan’s benefits to be “specified or definitely determinable on an actuarial basis.” 29 CFR § 778.215(a)(3)(i). This would be a more traditional defined benefit plan, similar to a pension.

The second option is for the plan to have “a definite formula for determining employer contributions and a definite formula for determining benefits paid under the plan.” This would be a hybrid of a defined benefit and defined contribution plan.

The third option is to provide for a formula for determining employer contributions and “a provision for determining the individual benefits by a method which is consistent with the purposes of the plan or trust under section 7(e)(4) of the act.” 29 CFR § 778.215(a)(3)(i)-(iii). This is a defined contribution plan. The regulations provide that whenever there is a defined contribution from the employer, as in options 2 and 3 above, the requirement for the formula “may be met by a formula which requires a specific and substantial minimum contribution and which provides that the employer may add somewhat to that amount within specified limits . . .” The variation allowed by the employer must not be so great that “the formula becomes meaningless.” 29 CFR § 778.215(a)(3)(iv).

If you’re still with me (and I forgive you if you aren’t) the employer’s contribution to the plan must be irrevocable and the employee must not be able to assign benefits or receive cash, except under certain circumstances such as termination of employment. 29 CFR § 778.215(4)-(5).

An Employment Lawyer’s Take on Valentine’s Day. Keep the Cards at Home.

You know, we employment lawyers and HR professionals generally get a really bad rap. Kill joys. Party Poopers (can I say that in this thing?). Fuddy-duddies (my grandma used to say that). Every time someone wants to have some fun in the office, in we come, looming over everyone saying NO! Guess what, nothing in this post is going to make you think anything different. I’m going to spoil all of your Valentine’s Day fun at the office. Valentine’s Day may be a time for you and your spouse or you and your significant other or you and your boyfriend or girlfriend, but it is decidedly not a time for you and your subordinate. And I have written about this before, not in this blog, but I have written about it. You’re going to have to trust me. I even was quoted in Above the Law. Now to most of you that is not a big deal, but to lawyers it is. Even a bigger deal than the TV interview I once did on this very topic. But enough ringing my own bell, back to good old St. Valentine. To start with, who exactly is St. Valentine and why do we have a holiday celebrating him? Let’s ask the History Channel:

“Every February 14, across the United States and in other places around the world, candy, flowers and gifts are exchanged between loved ones, all in the name of St. Valentine. But who is this mysterious saint, and where did these traditions come from?”

See http://www.history.com/topics/valentines-day/history-of-valentines-day

What a great question, in fact I just asked it and I want to know too. And then what I usually do after I find out, is make some strained connection to some employment law point and call it a post. But not this time. Oh, I’m still going to make an employment law point, but the connection here is just not that strained.

Back to the History Channel.com

“The history of Valentine’s Day–and the story of its patron saint–is shrouded in mystery. We do know that February has long been celebrated as a month of romance, and that St. Valentine’s Day, as we know it today, contains vestiges of both Christian and ancient Roman tradition. But who was Saint Valentine, and how did he become associated with this ancient rite?”

Id.

Now before we go any further, let me point out a couple of things from those quotes: Look, “gifts exchanged between loved ones” and “celebrated as a month of romance.” Starting to get the picture? See, “romance” and “office” equal “bad.” Not that strained after all. OK good, now back to the History Channel. I’m not going into all the stories of the Saints who may or may not be the real St. Valentine. But I am going to talk about some of that Roman tradition they mention. Again, according to the History Channel:

“While some believe that Valentine’s Day is celebrated in the middle of February to commemorate the anniversary of Valentine’s death or burial–which probably occurred around A.D. 270–others claim that the Christian church may have decided to place St. Valentine’s feast day in the middle of February in an effort to “Christianize” the pagan celebration of Lupercalia.”

Id. (again).

What do we care about “Lupercalia”? Really nothing, but get this, according to the History Channel on Lupercalia Roman priests would go to a cave where the founders of Rome (Romulus and Remus for those of you that didn’t know) were supposedly raised by a wolf, sacrifice a goat (and a dog), cut the goat hide into strips, dip the strips of goat hide into the blood and walk around town “gently slapping” people with the goat hide.” Id. (for those of you who wonder what Id. means, it means same cite as the last cite.) So what does this have to do with love and Valentine’s Day? Well, getting smacked with a blood dipped goat hide was a fertility rite, not really romance, but close. Oh those wacky Romans. So, I told you that story to ask you this: Does anyone think it is appropriate to walk around the office slapping people with goat hides? Of course not! All right, that one was a bit strained, but on to more recent history.

Seems as though Valentine’s Day was first associated with romance and love in the middle ages.

“The oldest known valentine still in existence today was a poem written in 1415 by Charles, Duke of Orleans, to his wife while he was imprisoned in the Tower of London following his capture at the Battle of Agincourt. (The greeting is now part of the manuscript collection of the British Library in London, England.) Several years later, it is believed that King Henry V hired a writer named John Lydgate to compose a valentine note to Catherine of Valois.”

Id. (one more time).

Now you have to admit, that is pretty romantic isn’t it? Much more romantic than being slapped with a goat hide. Plus, it has to do with Agnicourt, which I think is kind of cool because I happen to be a fan of that particular period of history.

And so we get to modern times. See, I always thought that greeting card companies invented Valentine’s Day, like I thought they invented Mother’s Day and my favorite fake holiday, Sweetest Day, just to sell more cards. Wait, that didn’t come out right, Mom, I don’t really think Mother’s Day is a fake holiday. According to Wikipedia about 190 million valentine cards are sent each year. And some of them have those little candy hearts in them and those cards and those little hearts say things like “BE MINE” and “LOVE YOU” and even “TRUE LOVE.” And that is where we get to the punch line and tie this whole thing back to you ending up in HR because your subordinate feels like you are being “Creepy.”

You see, a holiday that is dedicated to romance and love and, as young boys everywhere would say, all that “icky stuff” is not a holiday you want to be celebrating at work. Want to bring in heart shaped donuts for the staff? Go ahead, how very nice of you. Here is what you don’t do. You don’t buy your subordinates a card. And you don’t buy presents. As I famously said once before, there is no Valentine’s Day exception to the sexual harassment laws. And just like it is bad form to smack your subordinates with a goat hide, it is also bad form to buy them a card for a holiday dedicated to love. You’re right, it was a bit strained, but I told you I was going to spoil all your fun.

The regular rate exclusions: employee benefit and profit sharing plans

I know you woke up this morning wondering if you have to include payments under a savings or profit sharing plan into the regular rate when you pay overtime. No? I know I did.

The answer is probably not, if your plan is a bona fide profit sharing plan under the FLSA. The FLSA excludes employee benefit plans in two provisions. The first refers to “a bona fide profit-sharing plan or trust or bona fide thrift or savings plan” and leaves it up to the Department of Labor to specify requirements for those plans. 29 CFR § 778.200(a)(3). You probably get legal help of some kind in the employee benefits area – now is a good time to use it. The regulations governing employee benefits are fairly specific. So I will give you the shorthand version, and if you need help, call your trusty labor lawyer.

Under the regs, a “thrift or savings plan” is a program “for the purpose of encouraging voluntary thrift or savings by employees by providing an incentive to employees to accumulate regularly and retain cash savings for a reasonable period of time or to save through the regular purchase of public or private securities.” 29 CFR § 547.1(b). A profit sharing plan is a program “for the purpose of distributing to employees a share of profits as additional remuneration over and above the wages or salaries paid to employees which wages and salaries are not dependent upon or influenced by the existence of such profit-sharing plan or trust or the amount of payments made pursuant thereto.” 29 CFR § 549.1(b). In English, a profit-sharing plan is an extra benefit to employees, not part of their main compensation package.

The thrift or savings plan provisions and the profit sharing plans provisions share a few key themes. Number one, the plan needs to be a “definite program or arrangement.” 29 CFR §§ 547.1(b), 549.1(b). In other words, the plan needs to actually be a plan. Number two, there needs to be a provision for which employees participate, which is somewhat flexible, except that it may not be based on performance or efficiency. 29 CFR §§ 547.1(c), 549.1(d)(1)-(2). You can, however, exclude people based on work schedule – so for purposes of overtime, you need not include the high school kid who comes in to water the plants for an hour every two weeks in your profit sharing plan. 29 CFR §§ 547.1(c), 549.1(d)(1). Number three, there must be a formula for determining the amounts paid to employees, which can be based on straight-time pay, base rate of pay, or length of service. 29 CFR §§ 547.1(d), 549.1(e). So you have a fair amount of flexibility as far as who gets what, as long as that is not dependent on performance or efficiency. 29 CFR § 549.1(a).

Savings plans and profit sharing plans share some pitfalls, too. Payments under a plan cannot be excluded from the regular rate if the amount an individual gets is dependent on production, efficiency, or hours worked. 29 CFR §§ 547.2(c), 549.2(e). Participation in a savings plan must be voluntary. 29 CFR § 547.2(a), and employee wages cannot be offset or affected by the savings plan or profit sharing plan. 29 CFR §§ 547.2(b), 549.1. And that is key to excluding these types of plans. In short, what you can’t do is disguise “pay” as “profit sharing” and still exclude if from the regular rate calculation. Don’t try it, you will get caught.

Again, this is a quick version, so call your lawyer if you are trying to set up a program for the first time or if your program’s features have not been reviewed in a while.

Some companies also choose to compensate their employees with stock options. Back in the late nineties, while you were panic-buying Beanie Babies, the Department of Labor found that if an employer offered stock options as a form of compensation and the employees exercised the option and made a profit, that profit had to be included in the regular rate. This announcement caused an epidemic of heart palpitations in HR professionals around the country. After this determination by the DOL, Congress passed the Worker Economic Opportunity Act, amending the FLSA so that profits made on exercised stock options are not included in the regular rate if the stock option program complies with certain requirements.

These requirements are relatively simple, but specific. Number one, the employer must communicate the terms and conditions of the program to employees, either when the options are granted or when the employee begins participating. 29 CFR § 778.200(8)(i). Number two, the options must not be exercisable within the first six months after the grant, and the option’s exercise price must be at least 85% of the stock’s fair market value at the time of the grant. 29 CFR § 778.200(8)(ii). The statute makes exceptions for employees who die, become disabled, or retire before the 6 month period is over, and the limitation also does not apply if there is a change in corporate ownership. Number three, the employee’s exercise of the option must be voluntary – easy enough. 29 CFR § 778.200(8)(iii). Number four only applies if eligibility to participate in the program is tied to performance. If they are, the grants must be tied to the performance of a business unit of at least 10 employees, not individuals, or the entire plant. 29 CFR § 778.200(8)(iv)(A). However, the grants can be based on the duration of an individual’s service or a minimum schedule of hours or days worked. Employers can also base grants on past performance of individual employees, but only if the determination is discretionary and not pursuant to a contract. 29 CFR § 778.200. If you need a refresher on the true meaning of discretionary, see my post on discretionary bonuses.

There’s more to talk about in the employee benefits and incentives area, but we’ll leave it for next time.

The regular rate exclusions: Paying people for not doing work

I know it has been a couple of weeks since we posted anything and in my defense I have been running all over the state. Beginning of a new year and all that.  On the other hand, that is not really an excuse given that I still have a couple of posts that Emily wrote to post.  So I will try to get back to a more regular weekly schedule.  I promise.

We’re still talking about what not to include in your calculation of the regular rate for overtime purposes under the FLSA. Many employers provide paid time off of some kind for their employees, whether it be for illness, vacation, or being stuck in your driveway, something that happened to us in Michigan a lot last winter. The question is, do you have to include that illness or vacation pay in the regular rate when calculating overtime payments? The regulations exclude:

(1)  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; reasonable payments for traveling expenses, or other expenses, incurred by an employee in the furtherance of his employer’s interests and properly reimbursable by the employer; and other similar payments to an employee which are not made as compensation for his hours of employment

29 CFR § 778.218(d). Vacation, illness, and holiday pay are pretty self-explanatory – the regs add that this rule applies “[w]here the payments are in amounts approximately equivalent to the employee’s normal earnings during a similar period of time.” The regs also clarify that this provision applies to absences that are “infrequent or sporadic or unpredictable” as opposed to regular events like weekends or meal periods. 29 CFR § 778.218(a), (d).

Consider paid time off for holidays separately from any holiday premium paid – for example, paying double time or time and one-half for working on a holiday. We’ll deal with that later. This provision is only for hours the employee did not actually work.  You know, regular old holiday pay.

“Failure of the employer to provide sufficient work” is a little trickier. The regs give examples here: “where the employee would normally be working but for . . . a machinery breakdown, failure of expected supplies to arrive, weather conditions affecting the ability of the employee to perform work and similarly unpredictable obstacles beyond the control of the employer.” A regular slow period at work doesn’t count. 29 CFR § 778.218(c).  So if the employee is at work and not working because the machine is broken and they have to wait for it to be fixed before they can start working again, that time counts toward the regular rate.  But if the employee is sent home or doesn’t have to report to work because the machine is broken and you have a policy to pay them anyway, that time does not count.

The regs also give some guidance on what “other similar causes” are for the purposes of this provision. The key is infrequency and unpredictability: the regs give jury duty, death in the family, and weather conditions as examples. 29 CFR § 778.218(d).

The other piece to this provision is reimbursable business expenses, which is relatively straightforward. To fall under the exclusion, business expenses must be paid for expenses made on the employer’s behalf. The regs give some examples: amount spent for purchasing tools or supplies for the employer, purchasing or laundering required uniforms, transportation and other living expenses incurred by an employee traveling on the employer’s behalf, and – saving the best for last – “supper money,” “to cover the cost of supper when [the employee] is requested by his employer to continue work during the evening hours.” 29 CFR § 778.217(b).

You can’t cut down on the amount you pay in overtime by characterizing pay as reimbursement, though. Everyday expenses like rent, food, and ordinary transportation to and from work are incurred on the employee’s behalf, and if you decide to reimburse for those expenses for some reason, the payment must be included in the daily rate calculation. The amount of the reimbursement must also approximate the expense incurred – no reimbursing $8.25 for a $1.75 cup of coffee to disguise a higher pay rate. However, a per diem type of reimbursement may be excluded from the regular rate, even if employees are not required to submit receipts, if it is reasonable under the circumstances. Barry v. Excel Group, Inc., 288 F.3d 252, 253 (5th Cir. 2002). For example, for a day trip in Cleveland, a $50 per diem might be reasonable, but a $500 per diem would not be.

New Michigan Law Allows for Veterans’ Preference in Employment.

Wait a minute, it’s not Friday and this is not the FLSA, what is going on? Why am I sitting at my desk on a Saturday writing a blog post? Well, let me tell you. Late yesterday I got an email from one of our partners, Rob Dubault, a brilliant labor lawyer by the way, notifying me (and the other members of our practice group at good old Warner Norcross and Judd LLP) that Governor Snyder had just signed into law a new piece of legislation that applied to Michigan employers. I didn’t have time to read or write about it last night, so here I am.

So what is this new law that brings me into the office on a snowy Saturday in Michigan? It’s House Bill 5418, which will now be “known and cited as” the “Private Employer’s Veterans’ Preference Policy Act.” Well, what does this new law do? I’ll tell you what, it is so short that I’m just going to type the whole thing right into this blog post.

The People of the State of Michigan enact:

Sec. 1. (1) This act shall be known and may be cited as the “private employer’s veterans’ preference policy act”.

(2) As used in this act:

(a) “Private employer” means a sole proprietor, corporation, partnership, limited liability company, or other private entity with 1 or more employees.

(b) “Veteran” means an individual who meets 1 or more of the following:

(i) Has served on active duty with the armed forces of the United States for a period of more than 180 days and was discharged or released from active duty with other than a dishonorable discharge.

(ii) Was discharged or released from active duty with the armed forces of the United States because of a service‑connected disability

(iii) Was discharged or released from duty with other than a dishonorable discharge from service as a member of are serve or national guard component of the armed forces of the United States under an order to active duty, excluding active duty for training.

(c) “Veterans’ preference employment policy” means a private employer’s voluntary preference for hiring, promoting, or retaining a veteran over another equally qualified applicant or employee.

Sec. 2. (1) A private employer may adopt and apply a voluntary veterans’ preference employment policy.

(2) A veterans’ preference employment policy shall be in writing and shall be applied uniformly to employment decisions regarding the hiring or promotion of veterans or the retention of veterans during a reduction in the workforce.

This act is ordered to take immediate effect.

So here is what it does: It allows a private employer to put in place a written policy that gives preference to veterans in hiring, promotions and retention during a reduction in force.

Three things I want you to notice here: First, this law goes into effect immediately. I’m not going to bother with the why of governmental procedure in Michigan, just know that the law is now law. Second, a policy giving preference, if you are going to do one, has to be in writing. No unofficial policy that you can rely on, a written policy. And finally, take notice of the word, “MAY”. That’s right, the law does not require an employer to give preference, it allows an employer to do this.

So if you want to do this, give Rob or me a call.  You can find Rob here.

The regular rate exclusions: percentage bonuses

We talked already about discretionary bonuses and gifts, and how any bonus that is not truly discretionary or truly a gift must be included in the regular rate. If wondering about if the bonuses you pay are really discretionary is giving you chest pain, a percentage-based bonus may be right for you.

In a percentage bonus structure, you pay the employee a percentage of both their straight time pay and their overtime earnings. For example, if I work for 48 hours at $100 per hour (I can dream, can’t I?), and my employer pays a bonus equal to 10% of my straight time pay and 10% of my time-and-a-half overtime earnings, the bonus payment need not be calculated into the regular rate even if the bonus is not discretionary. How can this be you ask? Simple, because the percentage is calculated both on straight time pay and overtime earnings, the bonus adequately accounts for overtime worked – as the Department of Labor puts it, “as an arithmetic fact.” 29 CFR § 778.503. Yeah, arithmetic. We love arithmetic in this blog, . . . no wait, we hate arithmetic, but we will make this one exception. So if I work a 50 hour week, 40 hours at $100 per hour and 10 hours and $150 per hour, I would make $4,000 in straight time pay and $1,500 in overtime for a total of $5,500. If my employer paid me a 10% bonus of $550, it need not recalculate the regular rate based on the bonus because the bonus includes both 10% of straight time pay, $400, and 10% of overtime earnings, $150.

The catch is that you can’t use a different percentage for straight time pay and overtime pay, and you can’t use a percentage bonus system to deliberately evade FLSA requirements. The regs give an example of a plan that a scoundrel (or to give the benefit of the doubt, someone who is confused as to overtime requirements), could use to evade overtime pay requirements. I could pay an employee $300 per week no matter how many hours were worked. I could characterize the rate paid for the first 40 hours as the “regular rate,” and the rate paid for any overtime hours at time and one-half of the regular rate. I could then give a “bonus” as a percentage of overall earnings. The trick is that the percentage changes every week depending on the number of hours worked, and I really only pay my worker $300 per week. 29 CFR § 778.502. They call it a pseudo-bonus or a sham – not the pretty kind you put on your pillows, either. (Don’t forget Emily wrote this, I don’t even know what a pillow sham is. Steve).

Since this is a short post, now is as good a time as any to cover a miscellaneous exclusion. Talent fees in the radio and television industries may be excluded from the regular rate. Hopefully, if you are in one of those industries, you know what those are. If you don’t, the regs define them at 29 CFR § 550.1. Again, if you have questions, you should contact your trusty labor lawyer, who has always been there for you.

The regular rate exclusions: discretionary bonuses and signing bonuses.

Hey, guess what?  Emily is back.  

Last time we discussed the requirements for excluding gifts and Christmas bonuses from the regular rate under the FLSA. Now we are going to discuss discretionary bonuses, which are quite similar.

Under the Regs, you can exclude from the calculation of the regular rate:

(3) Sums paid in recognition of services performed during a given period if . . . (a) both the fact that payment is to be made and the amount of the payment are determined at the sole discretion of the employer at or near the end of the period and not pursuant to any prior contract, agreement, or promise causing the employee to expect such payments regularly.

29 CFR § 778.200 (a)(3). Like gifts and holiday bonuses, for the employer to exclude a discretionary bonus, the employer cannot be obligated to pay it. As soon as the employer promises to pay the bonus, whether in a collective bargaining agreement, or in a handbook or policy manual, the bonus is no longer discretionary and must be included in the regular rate. See O’Brien v. Town of Agawam, 350 F.3d 279, 295-96 (1st Cir. 2003). Also, if the bonus is tied to objective criteria like production numbers, efficiency rates, or even attendance, it is not a truly discretionary bonus and cannot be excluded from the regular rate. One caveat – according to the Department of Labor, it is okay to document the decision to pay the bonus in writing before the bonus is paid, as long as the employer did not previously promise the bonus. U.S. Dep’t of Labor FLSA Op. Letter 2008-12, (December 1, 2008).

What you can’t do is say in your employee handbook that you retain discretion to pay an annual or other periodic bonus when you pay it every year – it’s not discretionary just because you say so. The same is true for performance-based bonuses. For example, back when I was a seller of toys, we had a bonus program with a clear performance-based structure. If we hit daily sales targets, we were paid a bonus for each hour worked on that day. If my employer put something in the employee handbook about that bonus being discretionary, the bonus would still need to be included in the regular rate because it is tied to objective performance criteria, the sales targets. Hmmm . . . I think they might owe me a dollar or two.

You may be thinking, “What about a signing bonus?” Signing bonuses come in two flavors: up-front payments before work begins and deferred payments paid after a particular length of service. The up-front payments do not need to be included in the regular rate, but the deferred payments do. Those deferred payments are meant to encourage employees to remain at their job, and the Regs specify that they cannot be excluded. 29 CFR § 778.211(c). Since an up-front signing bonus isn’t related to the employee’s length of service, it can be excluded from the regular rate. Minizza v. Stone Container Corp. Corrugated Container Div. East Plant, 842 F.2d 1456, 1462 (3d Cir. 1988).

Next time, we’ll take on the thrilling topic of percentage bonuses.

Screening your employees to see if they are stealing isn’t stealing time.

You have a bunch of employees that work in your warehouse. You also have a bunch of really cool stuff that you ship from your warehouse. Apparently, you don’t trust your employees, because at the end of each shift you require your employees to wait around while you conduct security screens of each employee to make sure that they are not walking out of the warehouse with your really cool stuff. Do you have to pay your employees for the time they spend (up to 25 minutes each day by the way) waiting to go through your security screen? According to the Supreme Court the answer is a big old NO!

Yesterday, SCOTUS issued its opinion, a unanimous opinion by the way, in Integrity Staffing Solutions, Inc., v. Jesse Busk et al., 574 U.S. __ (2014). You can see it here.

“Integrity Staffing Solutions, Inc. provides warehouse staffing to Amazon.com throughout the United States. Respondents Jesse Busk and Laurie Castro worked as hourly employees of Integrity Staffing at warehouses in Las Vegas and Fenley, Nevada, respectively. As warehouse employees, they retrieved products from the shelves and packaged those products for delivery to Amazon customers.”

Id.

According to the opinion, at the end of each shift Integrity requires its employees to pass through a metal detector. From the sounds of it, it was like boarding a plane without the pat down or full body scan. You know, you take your keys and wallet and stuff out of your pockets and walk through a metal detector. We do that all the time now, don’t we, at airports, going into stadiums, even at some schools. No big deal, right? Seems like it was a big deal for the employees. They filed suit claiming that the failure by Integrity to pay for the time it took for these screens, up to 25 minutes per day according to the plaintiff’s, should have been paid under the FLSA. They argued that the screenings were to prevent theft and thus “solely for the benefit of the employers . . . .” Id.

SCOTUS disagreed. First, the Court pointed to the Portal-to-Portal Act and reminded us that “activities which are preliminary to or postliminary to said principal activity or activities” are excluded from the FLSA’s coverage. We talked about this a while ago. Remember Donning and Doffing? Check it out here. Then the court reminded us that principal activity includes activities that are an integral and indispensable part of the principal activity. The question, according to the Court, “Was the waiting time for the screen an ‘integral and indispensable part of the principal activities’ of the employees?” If it is, it is paid time. If it is not, it is unpaid time.

The Court then said that an activity is “integral and indispensable to the principal activities that an employee is employed to perform if it is an intrinsic element of those activities and one with which the employee cannot dispense if he is to perform his principal activities.” Like, the Court said, “showering and changing clothes” after working with toxic chemicals, or “sharpening knives” in a meat packing plant but not “donning protective gear” in a poultry plant.

Ultimately, the Court held that the security screenings at issue were not compensable. In short, the company does not have to pay the employee’s while they wait for their turn to go through the metal detector.

SCOTUS said, quite logically, screenings were not “principal activities” pointing out that the company did not employ the employees to be screened. They employed them to ship products. Then the Court noted that the screenings were not “integral and indispensable” to shipping products. The Court stated that the employees could have very easily continued to ship products even if the screenings stopped. They also could have walked off with a bunch of really cool stuff form the warehouse. The Court didn’t say that I did and Integrity must be worried about it of why do the screens?

Then the Court noted that the 9th Circuit erred when it focused on the fact that the employer required the screenings stating: “If the test could be satisfied merely by the fact that an employer required an activity, it would sweep into “principal activities,” the very activities that the Portal-to-Portal Act was designed to address.” Id. Makes sense again right? I mean like I said before, who would drive to work if their employer didn’t make them do it? Especially today when so many jobs can be done remotely. And finally, the Court rejected the employee’s argument that they should get paid for waiting simply because the employer could, if they wanted, shorten the waiting time. Basically, the court said deal with it at the bargaining table it is not covered by the FLSA.

Again, you can see the whole opinion here if you are interested.  Oh and by the way, I wrote this one, we will get back to Emily next time.

No, no, don’t count that. The regular rate exclusions: gifts

OK, I have to tell you something before we get started. I did not write this post. In fact, I did not write any of the next 8 posts. Emily Rucker did. Emily is one of our new associates and she is really smart. Turns out she is pretty funny too. I hope you enjoy and learn something.

Steve.  Oh, and here is a picture of Emily so you can put a face with a name when you hire her to be your lawyer.

Emily

I know you’re sick of talking about the regular rate. I’m sorry. I really am. But we haven’t covered everything yet. In the last few weeks, we did some painful calculations to figure out the “regular rate” for overtime purposes. And by painful, you know I mean painful for Steve because he hates math. Now we are going to talk about what you can exclude when calculating the regular rate. The good news is that since we are excluding instead of including, the math will be kept to a minimum. We’ll take the exclusions one at a time.

One important note before getting into the meat of the rules: most of the payments excluded from the regular rate cannot be credited towards overtime compensation, but a few of them can. I’ll note those cases as they come up.

First, we’ll take on “bonuses”. As we discussed earlier, some kinds of bonuses must be included in the calculation of the regular rate, like those for employees who get an hourly rate plus a production bonus. Some types of bonuses do not have to be included. One of the kinds that can be excluded are bonuses that are really gifts.

Gifts? Yea, gifts, you know, like Christmas gifts  (other holidays are relegated to “special occasions” under the regs). Although the traditional Christmas bonus seems to be going the way of the passenger pigeon for many employers, it was still an important part of compensation at the time the FLSA was passed. According to sociologist Vivian A. Zelizer, Christmas bonuses started when employers began replacing gifts like turkeys and gold coins with cash around the turn of the 20th century. They became a common way to keep workers happy, especially before overtime rates came into the picture with the FLSA. Apparently people like cash better than turkeys – who knew?

The FLSA excludes the following from the regular rate:

(1)                   Sums paid as gifts; payments in the nature of gifts made at Christmas time or on other special occasions, as a reward for service, the amounts of which are not measured by or dependent on hours worked, production, or efficiency

29 CFR § 778.200 (C)(1).

Thanks, you shouldn’t have. If the gift is really a bonus based on the quantity or quality of the employee’s work, you must still include the amount in the regular rate computations. The regs give some further guidance on this concept:

(b) Gift or similar payment. . . . the bonus must be actually a gift or in the nature of a gift. If it is measured by hours worked, production, or efficiency, the payment . . . is no longer to be considered as in the nature of a gift. If the payment is so substantial that it can be assumed that employees consider it a part of the wages for which they work, the bonus cannot be considered to be in the nature of a gift. Obviously, if the bonus is paid pursuant to contract (so that the employee has a legal right to the payment and could bring suit to enforce it), it is not in the nature of a gift.

Once, I worked at a toy store, and we went to a retail show to sell toys. We didn’t make much money, so when the weekend was over my “bonus” was a stuffed goat. I still have it. His name is Herman. Since my employer never promised a bonus, and I did not receive the goat based on my performance, the value of that stuffed goat did not need to be factored into the regular rate. The regs give you a little more flexibility when it comes to yearly gifts like Christmas bonuses:

(c) Application of exclusion. If the bonus paid at Christmas or on other special occasion is a gift or in the nature of a gift, it may be excluded from the regular rate . . . even though it is paid with regularity so that the employees are led to expect it and even though the amounts . . . vary with the amount of the salary or regular hourly rate of such employees or according to their length of service with the firm so long as the amounts are not measured by or directly dependent upon hours worked, production, or efficiency.

29 CFR §778.212(a)-(b). To continue with the goat example . . . if on my birthday I received one stuffed goat or another stuffed cloven-hooved creature for every year I worked at the store, the value of the stuffed goat need not be included in the regular rate. But if I received one goat for every ten goats sold, then the value of the goats must be included.

See, that wasn’t so bad? No math at all. Next week, we’ll take on discretionary bonuses and signing bonuses.

 

The regular rate and commissions. Part Last.

That’s a couple of weeks just talking about how commissions can affect the regular rate. That seems like a lot, doesn’t it? Well, this is the last time – in fact this is the last time in something like 10 or 12 posts that we will be talking about adding things to the hourly rate to get to the regular rate. So what do we have left? Well, just a couple of minor points that will wrap all of this up. The first deals with delays in computing commission payments. The DOL recognized that the business world does not run in nice neat little time chunks. So they understood when they drafted these Regulations that especially with commissions you could not expect to wrap it up all in one neat little package. So?

If there are delays in crediting sales or debiting returns or allowances which affect the computation of commissions, the amounts paid to the employee for the computation period will be accepted as the total commission earnings of the employee during such period, and the commission may be allocated over the period from the last commission computation date to the present commission computation date, even though there may be credits or debits resulting from work which actually occurred during a previous period. The hourly increase resulting from the commission may be computed as outlined in the preceding paragraphs.

29 CFR § 778.121.

Basically, you get a break, and if, after you have computed and allocated commission payments for your defined period, there are changes due to, say, payments not being made, or bounced checks or some other thing that would change the commission, you don’t have to go back and do it all over again. You can allocate those changes to the new period even though the work was done in the last period.

And last, and what I would consider really rare, you can use a basic rate for employees paid wholly or partly on commission. Go here for a discussion of the basic rate. And here is that Reg:

Overtime pay for employees paid wholly or partly on a commission basis may be computed on an established basic rate, in lieu of the method described above. See §778.400 and part 548 of this chapter.

29 CFR § 778.122.

Next time we are going to move into Part C of Section 778 of the Regulations and start talking about some things you get to exclude rather than include in the regular rate. And next time, I have a surprise for you.

 

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