When are Longevity Payments Excludable from the Regular Rate of Pay?

On Jan. 15, new U.S. Department of Labor (DOL) rules became effective that update what an employer must include when it calculates an employee’s regular rate of pay as the basis for determining the proper overtime rate. We recently posted a blog explaining the new regulatory action.

The legacy rules

By way of review, when non-exempt employees (mostly hourly workers) work more than 40 hours in a workweek, they must be paid 1.5 times their regular rate of pay for every overtime hour above 40 worked. The regular rate includes “remuneration for employment paid,” but the regular rate of pay includes more than just the wage or salary amount. For example, you add to the wage or salary amount some bonuses, commissions, shift differential pay, and on-call pay.

The law also excluded certain benefits from the regular rate of pay, like paid time off (PTO), health insurance, discretionary bonuses, and certain gifts.

This rule became problematic when new kinds of employee benefits (think parking, transportation, wellness, technology, and others) evolved. Employers were often unsure whether to include or exclude new benefit types from the rate. They either had to include them and risk paying higher overtime rates than may have been required or exclude them improperly and risk underpaying overtime. To avoid this dilemma, some employers decided not to offer benefits and perks that fell into this gray area.

The new rules and longevity payments

To help resolve this confusion and to encourage employers to offer creative kinds of benefits, the new rules designate a list of benefits as excludable from the regular rate of pay. As a follow-up, on March 26, the Wage and Hour Division (WHD) within the DOL issued three opinion letters to provide further guidance about whether to include certain benefit types in the regular rate of pay.

One opinion letter discusses longevity payments based on employee service. The agency excludes payments that are like a gift on a special occasion to reward service. Excludable longevity payments may not be tied to employee hours worked, productivity, or efficiency. Excludability is dependent on recognition of the length of or appreciation of service.

Certain aspects of such payments can destroy their gift-like nature and excludability:

• A payment so large that the employee considers it part of wages
• A payment required by a contract
• A payment required by law

These WHD clarifications should help employers determine whether longevity payments are properly excludable from the regular rate calculation or whether to restructure payments to comply with excludability requirements.