Archive for February, 2015

The regular rate exclusions: premium pay

Many employers operate on holidays, or weekends, and pay employees more on holidays to encourage them to work. Some do this the wrong way – for example, it always seems wrong to me that it’s New Year’s Day, not New Year’s Eve, that gets the “holiday” status. Once, I worked at a video store that was open 365 days a year, and I worked New Year’s Eve. That year there was a huge snowstorm and everybody wanted movies. They paid me time and a half, all right – but only for the hour and a half that my 5 p.m. to 1:30 a.m. shift bled over to New Year’s Day from New Year’s Eve. But, I digress. I don’t work in video rental now for a reason (plus my employer declared bankruptcy about six months after I left along with most other traditional video rental companies).

But I digress, so back to how to treat this premium pay when calculating the regular rate? A burning question, I know. The FLSA considers these premiums a form of overtime pay only if the premium is at least time and one-half of the employee’s rate for similar work in non-overtime hours. 29 CFR § 778.203(a). For pieceworkers or workers with more than one rate, this rate is “either (1) the bona fide rate applicable to the type of job the employee performs on the “special days,” or (2) the average hourly earnings in the week in question.” 29 CFR § 778.203(a). If the premium meets that requirement, it need not be included in the regular rate and can be credited towards overtime compensation.

The other type of premium considered an overtime premium is extra pay for hours outside of an employee’s normal working hours; for example, if the employer pays a premium for working more than eight hours a day. That can be credited toward your overtime obligation.  Here is what I mean.  If you promise to pay time and one half for all work in excess of 8 hours in a day and the employee works say 10 hours on Monday so by the end of the week they have worked 42 hours you don’t have to pay the overtime premium twice.  In other words, you get credit at the end of the week for the 41st and 42nd hours because you already paid the employee time and one half for the 9th and 10th hour they worked that workweek.

The catch is that you can’t give an employee arbitrary “normal working hours” to avoid paying overtime. For example, say my employee’s “regular” working hours are 8 a.m. to 12 p.m., and during that time I pay an artificially low hourly rate. From 12 p.m. to 5 p.m., I pay the employee time and one-half for working outside of her “regular working hours.” That way I can get out of rolling the higher rate into the regular rate for overtime, right? No – the regs call this scheme out as “a device to contravene the statutory purposes and the premiums will be considered part of the regular rate.” 29 CFR § 778.202(c).

The regulations do make a distinction between paying employees a premium for work outside of regular working hours and paying a premium for undesirable working conditions, like a standard shift differential. If you pay a premium for work outside an employee’s regular working hours (which must not exceed eight hours per day) or outside of the regular workweek (which must not exceed 40 hours per week) and the pay with premium is at least time and one-half, then that is considered overtime compensation and you need not include the premium in the regular rate. However, if you pay a premium for undesirable working conditions, such as paying more for hours worked between midnight and 6 a.m. only, that premium can neither be excluded from the regular rate nor credited towards overtime compensation. 29 CFR § 778.204(b). The rationale is that you are not really paying an overtime premium, you are paying more because no one likes working overnights.   And by the way, if you don’t like working overnight, don’t go to law school.  Lawyers work all the time.

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?”


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

“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?”


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.