[Federal Register Volume 84, Number 61 (Friday, March 29, 2019)]
[Proposed Rules]
[Pages 11888-11912]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-05687]


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 Proposed Rules
                                                 Federal Register
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
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  Federal Register / Vol. 84, No. 61 / Friday, March 29, 2019 / 
Proposed Rules  

[[Page 11888]]



DEPARTMENT OF LABOR

Wage and Hour Division

29 CFR Parts 548 and 778

RIN 1235-AA24


Regular Rate Under the Fair Labor Standards Act

AGENCY: Wage and Hour Division, Department of Labor.

ACTION: Notice of proposed rulemaking and request for comments.

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SUMMARY: The Fair Labor Standards Act (FLSA or Act) generally requires 
that covered, nonexempt employees receive overtime pay of at least one 
and one-half times their regular rate of pay for time worked in excess 
of 40 hours per workweek. The regular rate includes all remuneration 
for employment, subject to the exclusions outlined in section 7(e) of 
the FLSA. Part 778 of Title 29, Code of Federal Regulations (CFR), 
contains the Department of Labor's (Department) official interpretation 
of the overtime compensation requirements in section 7 of the FLSA, 
including requirements for calculating the regular rate. Part 548 of 
Title 29 implements section 7(g)(3) of the FLSA, which permits 
employers, under specific circumstances, to use a basic rate to compute 
overtime compensation rather than a regular rate. The Department has 
not updated many of these regulations, however, in more than half a 
century--even though compensation practices have evolved significantly. 
In this Notice of Proposed Rulemaking (NPRM), the Department proposes 
updates to a number of regulations both to provide clarity and better 
reflect the 21st-century workplace. These proposed changes would 
promote compliance with the FLSA; provide appropriate and updated 
guidance in an area of evolving law and practice; and encourage 
employers to provide additional and innovative benefits to workers 
without fear of costly litigation.

DATES: Submit written comments on or before May 28, 2019.

ADDRESSES: You may submit comments, identified by Regulatory 
Information Number (RIN) 1235-AA24, by either of the following methods: 
Electronic Comments: Submit comments through the Federal eRulemaking 
Portal at http://www.regulations.gov. Follow the instructions for 
submitting comments. Mail: Address written submissions to Division of 
Regulations, Legislation, and Interpretation, Wage and Hour Division, 
U.S. Department of Labor, Room S-3502, 200 Constitution Avenue NW, 
Washington, DC 20210. Instructions: Please submit only one copy of your 
comments by only one method. All submissions must include the agency 
name and RIN, identified above, for this rulemaking. Please be advised 
that comments received will become a matter of public record and will 
be posted without change to http://www.regulations.gov, including any 
personal information provided. All comments must be received by 11:59 
p.m. on the date indicated for consideration in this rulemaking. 
Commenters should transmit comments early to ensure timely receipt 
prior to the close of the comment period, as the Department continues 
to experience delays in the receipt of mail. Submit only one copy of 
your comments by only one method. Docket: For access to the docket to 
read background documents or comments, go to the Federal eRulemaking 
Portal at http://www.regulations.gov.

FOR FURTHER INFORMATION CONTACT: Melissa Smith, Director of the 
Division of Regulations, Legislation, and Interpretation, Wage and Hour 
Division, U.S. Department of Labor, Room S-3502, 200 Constitution 
Avenue NW, Washington, DC 20210; telephone: (202) 693-0406 (this is not 
a toll-free number). Copies of this NPRM may be obtained in alternative 
formats (Large Print, Braille, Audio Tape or Disc), upon request, by 
calling (202) 693-0675 (this is not a toll-free number). TTY/TDD 
callers may dial toll-free 1-877-889-5627 to obtain information or 
request materials in alternative formats. Questions of interpretation 
and/or enforcement of the agency's regulations may be directed to the 
nearest WHD district office. Locate the nearest office by calling WHD's 
toll-free help line at (866) 4US-WAGE ((866) 487-9243) between 8 a.m. 
and 5 p.m. in your local time zone, or log onto WHD's website for a 
nationwide listing of WHD district and area offices at http://www.dol.gov/whd/america2.htm.
    Electronic Access and Filing Comments: This proposed rule and 
supporting documents are available through the Federal Register and the 
http://www.regulations.gov website. You may also access this document 
via WHD's website at http://www.dol.gov/whd/. To comment electronically 
on Federal rulemakings, go to the Federal eRulemaking Portal at http://www.regulations.gov, which will allow you to find, review, and submit 
comments on Federal documents that are open for comment and published 
in the Federal Register. You must identify all comments submitted by 
including ``RIN 1235-AA24'' in your submission. Commenters should 
transmit comments early to ensure timely receipt prior to the close of 
the comment period (11:59 p.m. on the date identified above in the 
DATES section); comments received after the comment period closes will 
not be considered. Submit only one copy of your comments by only one 
method. Please be advised that all comments received will be posted 
without change to http://www.regulations.gov, including any personal 
information provided.

SUPPLEMENTARY INFORMATION: 

I. Executive Summary

    The FLSA generally requires covered employers to pay nonexempt 
employees overtime pay of at least one and one-half times their regular 
rate for hours worked in excess of 40 per workweek. The FLSA defines 
the regular rate as ``all remuneration for employment paid to, or on 
behalf of, the employee''--subject to eight exclusions established in 
section 7(e).\1\ Parts 548 and 778 of CFR Title 29 contain the 
regulations addressing the overtime compensation requirements in 
section 7 of the FLSA, including requirements for calculating the 
regular rate of pay.
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    \1\ See 29 U.S.C. 207(e).
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    The Department promulgated the majority of part 778 more than 60 
years ago, when typical compensation often consisted predominantly of 
traditional wages; paid time off for holidays and vacations; and 
contributions to basic medical, life insurance, and disability

[[Page 11889]]

benefits plans.\2\ Since that time, the workplace and the law have 
changed.
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    \2\ See Bureau of Labor Statistics, An Overview of Employee 
Benefits 20 (2005), https://www.bls.gov/careeroutlook/2005/summer/art02.pdf.
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    First, employee compensation packages, including employer-provided 
benefits and ``perks,'' have evolved significantly. Many employers, for 
example, now offer various wellness benefits, such as fitness classes, 
nutrition classes, weight loss programs, smoking cessation programs, 
health risk assessments, vaccination clinics, stress reduction 
programs, and training or coaching to help employees meet their health 
goals.
    Both law and practice concerning more traditional benefits, such as 
sick leave, have likewise evolved in the decades since the Department 
first promulgated part 778. For example, instead of providing separate 
paid time off for illness and vacation, many employers now combine 
these and other types of leave into paid time off plans. Moreover, in 
recent years, a number of state and local governments have passed laws 
requiring employers to provide paid sick leave. In 2011, for example, 
Connecticut became the first state to require private-sector employers 
to provide paid sick leave to their employees.\3\ Today, 11 states, the 
District of Columbia,\4\ and various cities and counties \5\ require 
paid sick leave, and many other states are considering similar 
requirements.
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    \3\ See Conn. Gen. Stat. P.A. 11-52.
    \4\ See Ariz. Title 23, Ch. 2, art. 8, Sec. Sec.  23-363, 23-
364, & art. 8.1; Cal. Labor Code Sec. Sec.  245, 2810.5; Conn. Gen. 
Stat. P.A. 11-52; D.C. Code Sec.  32-131.01 et seq.; Md. Code Ann. 
HB 0001; Mass. Gen. Laws ch. 149, Sec.  148(c), (d); Mich. Comp. 
Laws Sec. Sec.  408.961-974 (effective Mar. 29, 2019); N.J. A1827; 
Or. Rev. Stat. Sec. Sec.  653.256, 659A.885; R.I. Gen. Laws Title 
28, Ch. 28-57; 21 Vt. Stat. Sec. Sec.  384, 481-485, 345; 29 Vt. 
Stat. Sec.  161; Wash. Rev. Code Sec. Sec.  49.46.005, 49.46.020, 
49.46.090, 49.46.100.
    \5\ See, e.g., Austin, Tex., City Code 4-19 (2018); Minneapolis, 
Minn., Admin. Code. 40.10 (2016); Phila., Pa., Admin. Code 9-4100 
(2015); N.Y.C., N.Y., Admin. Code 20-911 (2013); Seattle, Wash., 
Mun. Code. 14.16 (2011).
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    Recently, several states and cities have also begun considering and 
implementing scheduling laws. In the last 5 years, for example, New 
York, San Francisco, Seattle, and other cities have enacted laws 
imposing penalties on employers that change employees' schedules 
without the requisite notice, and various state governments are 
considering and beginning to pass similar scheduling legislation.\6\ 
Some of these laws expressly assert that the penalties are not part of 
the regular rate under state law,\7\ but confusion abounds for 
employers trying to determine how these and other penalties may affect 
regular rate calculations under federal law.
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    \6\ See N.Y.C., N.Y., Admin. Code 20-1201 (2017); Seattle, 
Wash., Mun. Code 14.22.050 (2017); SB 828, 73rd Leg. Assemb., 2017 
Reg. Sess. (Or. 2017); see also Emeryville, Cal., Mun. Code 5-39.01 
(2017); S.F., Cal., Police Code art. 33G (2015).
    \7\ See, e.g., Employee Scheduling (Call-in Pay), N.Y. St. Reg. 
LAB. 47-17-00011-P, at Sec.  142-2.3(a)(2) (proposed November 11, 
2017) (``Minimum rate. Payments for other hours of call-in pay shall 
be calculated at the basic minimum hourly rate with no allowances. 
Such payments are not payments for time worked or work performed and 
need not be included in the regular rate for purposes of calculating 
overtime pay.''); Or. Rev. Stat. Ann. Sec.  653.412(7)(d) (effective 
July 1, 2018) (``Regular rate of pay'' does not include ``[a]ny 
additional compensation an employer is required to pay an employee 
under ORS 653.442 [right to rest between work shifts] or 653.455 
[compensation for work schedule changes].'').
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    The Department believes that its current regulations do not 
sufficiently reflect these and other such developments in the 21st-
century workplace. In this NPRM, the Department proposes to update its 
regulations in part 778 to reflect these changes in the modern 
workplace and to provide clarifications that reflect the statutory 
language and WHD's enforcement practices. In so doing, the Department 
intends to promote compliance with the FLSA; provide appropriate and 
updated guidance to employers with evolving worker benefits, including 
employers that offer paid leave; give clarity concerning the proper 
treatment of scheduling-penalty payments under the FLSA; and encourage 
employers to provide additional and more creative benefits without fear 
of costly litigation.
    The proposed rule would clarify when unused paid leave, bona fide 
meal periods, reimbursements, benefit plans, and certain ancillary 
benefits may be excluded from the regular rate. The proposed rule would 
also revise certain sections of the regulation to adhere more closely 
to the Act. Additionally, the Department proposes minor clarifications 
and updates to part 548 of Title 29, which implements section 7(g)(3) 
of the FLSA. Section 7(g)(3) permits employers, under specific 
circumstances, to use a basic rate to compute overtime compensation 
rather than a regular rate.\8\ The Department invites comments from the 
public on all aspects of this NPRM. The Department estimates below the 
economic effects of this rule. The Department estimates qualitatively 
the potential benefits associated with reduced litigation at $281 
million over 10 years, or $28.1 million per year. The Department also 
estimates that this proposed rule, if finalized, would result in one-
time regulatory familiarization costs of $36.4 million, which results 
in a 10-year annualized cost of $4.1 million at a discount rate of 3 
percent or $4 million at a discount rate of 7 percent.
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    \8\ See 29 U.S.C. 207(g)(3).
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    This proposed rule is an Executive Order (E.O.) 13771 deregulatory 
action. Additional details on the estimated reduced burdens and cost 
savings of this proposed rule can be found in the rule's economic 
analysis.

II. Background

    Congress enacted the FLSA in 1938 to remedy ``labor conditions 
detrimental to the maintenance of the minimum standard of living 
necessary for health, efficiency, and the general well-being of 
workers[,]'' which burdened commerce and constituted unfair methods of 
competition.\9\ In relevant part, section 7(a) of the FLSA requires 
employers to pay their employees overtime at one and one-half times 
their ``regular rate'' of pay for time worked in excess of 40 hours per 
workweek.\10\ The FLSA, however, did not define the term ``regular 
rate'' when enacted.
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    \9\ 29 U.S.C. 202(a); see Fair Labor Standards Act of 1938, 
Public Law 75-718, ch. 676, 52 Stat. 1060 (codified as amended at 29 
U.S.C. Sec. Sec.  201-219).
    \10\ 29 U.S.C. 207(a). The statutory maximum in 1938 was 44 
hours per workweek; in 1939, it was 42 hours per workweek; and in 
1940, it was 40 hours per workweek. See Public Law 75-718, 52 Stat. 
at 1063.
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    Later that year, WHD issued an interpretive bulletin addressing the 
meaning of ``regular rate,'' which WHD later revised and updated in 
1939 and 1940. The 1940 version of the bulletin stated, among other 
things, that an employer did not need to include extra compensation 
paid for overtime work in regular rate calculations.\11\ It also 
specified that the regular rate must be ``the rate at which the 
employee is actually employed and paid and not upon a fictitious rate 
which the employer adopts solely for bookkeeping purposes.'' \12\
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    \11\ See Interpretive Bulletin No. 4 ] 13 (Nov. 1940).
    \12\ Id. at ] 18.
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    In 1948, the Supreme Court in Bay Ridge Operating Co. v. Aaron, 334 
U.S. 446, addressed whether specific types of compensation may be 
excluded from the regular rate, or even credited towards an employer's 
overtime payment obligations. The Court held that an overtime premium 
payment, which it defined as ``extra pay for work because of previous 
work for a specified number of hours in the workweek or workday whether 
the hours are specified by contract or statute,'' could be excluded 
from the computation of the regular rate.\13\ Permitting ``an overtime 
premium to enter into the computation of the regular rate would be to 
allow

[[Page 11890]]

overtime premium on overtime premium--a pyramiding that Congress could 
not have intended.'' \14\ The Court also held that ``any overtime 
premium paid, even if for work during the first forty hours of the 
workweek, may be credited against any obligation to pay statutory 
excess compensation.'' \15\ By contrast, the Court noted, ``[w]here an 
employee receives a higher wage or rate because of undesirable hours or 
disagreeable work, such wage represents a shift differential or higher 
wages because of the character of work done or the time at which he is 
required to labor rather than an overtime premium. Such payments enter 
into the determination of the regular rate of pay.'' \16\
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    \13\ 334 U.S. at 450 n.3, 465-66.
    \14\ Id. at 464.
    \15\ Id. at 464-65.
    \16\ Id. at 468-69.
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    After the Bay Ridge decision, in 1948 the Department promulgated 29 
CFR part 778, concerning the regular rate.\17\ This regulation codified 
the principles from Bay Ridge that extra payments for hours worked in 
excess of a daily or weekly standard established by contract or statute 
may be excluded from the regular rate and credited toward overtime 
compensation due, and that extra payments for work on Saturdays, 
Sundays, holidays, or at night that are made without regard to the 
number of hours or days previously worked in the day or workweek must 
be included in the regular rate and may not be credited toward the 
overtime owed.\18\ It noted, however, that when extra payments for work 
on Saturdays, Sundays, holidays, or nights are contingent on the 
employee having previously worked a specified standard number of hours 
or days, such payments are true overtime premium payments that may be 
excluded from the regular rate and credited toward overtime 
compensation due.\19\ The Department also explained that payments 
``that are not made for hours worked, such as payments for idle 
holidays or for an occasional absence due to vacation or illness or 
other similar cause'' may be excluded from the regular rate, but could 
not be credited against statutory overtime compensation due.\20\
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    \17\ See 13 FR 4534 (Aug. 6, 1948).
    \18\ See 29 CFR 778.2 (1948).
    \19\ See id.
    \20\ Id.
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    Congress responded to the Bay Ridge decision in 1949 by amending 
the FLSA to identify two categories of payments that could be excluded 
from the regular rate and, in addition, credited toward overtime 
compensation due.\21\ The first category was extra compensation for 
work on Saturdays, Sundays, holidays, or the sixth or seventh day of 
the workweek paid at a premium rate of one and one-half times the rate 
paid for like work performed in nonovertime hours on other days. The 
second category was extra compensation paid pursuant to an applicable 
employment contract or collective bargaining agreement for work outside 
of the hours established therein as the normal workday (not exceeding 
eight hours) or workweek (not exceeding 40 hours) at a premium rate of 
one and one-half times the rate paid for like work performed during the 
workday or workweek.\22\
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    \21\ See Public Law 81-177, ch. 352, 63 Stat. 446 (July 20, 
1949). These provisions are currently codified at 29 U.S.C. 
207(e)(6)-(7).
    \22\ See id.
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    On October 26, 1949, Congress again amended the FLSA.\23\ The 
amendments added, among other things, a comprehensive definition of the 
term ``regular rate.'' \24\ ``Regular rate'' was defined to include 
``all remuneration for employment paid to, or on behalf of, the 
employee[,]'' \25\ with the exception of an exhaustive list of seven 
specific categories of payments that could be excluded from the regular 
rate.\26\ Those categories of excludable payments were: (1) Gifts and 
payments on special occasions; (2) payments made for occasional periods 
when no work is performed such as vacation or sick pay, reimbursements 
for work-related expenses, and other similar payments that are not 
compensation for hours of employment; (3) discretionary bonuses, 
payments to profit-sharing or thrift or savings plans that meet certain 
requirements, and certain talent fees; (4) contributions to a bona fide 
plan for retirement, or life, accident, or health insurance; (5) extra 
compensation provided by a premium rate for certain hours worked in 
excess of eight in a day, 40 hours in a workweek, or the employee's 
normal working hours; (6) extra compensation provided by a premium rate 
for work on Saturdays, Sundays, regular days of rest, or the sixth or 
seventh days of the workweek; and (7) extra compensation provided by a 
premium rate pursuant to an employment contract or collective 
bargaining agreement for work outside of the hours established therein 
as the normal workday (not exceeding eight hours) or workweek (not 
exceeding 40 hours).\27\ The October 1949 amendments also added a 
provision specifying that the last three of these categories are 
creditable against overtime compensation due.\28\
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    \23\ See Fair Labor Standards Amendments of 1949, Public Law 81-
393, ch. 736, 63 Stat. 910.
    \24\ Id. Sec.  7, 63 Stat. at 913. This provision is currently 
codified at 29 U.S.C. 207(e).
    \25\ Id.
    \26\ See id., 63 Stat. at 913-14. These provisions are currently 
codified at 29 U.S.C. 207(e)(1)-(7).
    \27\ See id. The excludable categories of payments in sections 
7(d)(6) and (7) in the October 1949 amendments were essentially the 
same as those that had been added in the July 1949 amendments as 
sections 7(e)(1) and (2); the October 1949 amendments eliminated 
them from section 7(e).
    \28\ See id., Public Law 81-393, 63 Stat. at 915. This provision 
is currently codified at 29 U.S.C. 207(h) (payments described in 
sections 7(e)(5)-(7) are creditable).
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    In 1950, the Department updated part 778 to account for the 1949 
amendments to the FLSA.\29\ These regulations explained general 
principles regarding overtime compensation and the regular rate, 
including the principle that each workweek stands on its own for 
purposes of determining the regular rate and overtime due.\30\ The 
regulations also provided methods for calculating the regular rate 
under different compensation systems, such as salary and piecework 
compensation.\31\ They further elaborated on the seven categories of 
payments that are excludable from regular rate calculations, and 
provided several examples.\32\ The regulations also addressed special 
problems and pay plans designed to circumvent the FLSA.\33\
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    \29\ See 15 FR 623 (Feb. 4, 1950) (codified at 29 CFR 
778.0-.27).
    \30\ See 29 CFR 778.2 (1950).
    \31\ See 29 CFR 778.3(b) (1950).
    \32\ See 29 CFR 778.5-.8 (1950).
    \33\ See 29 CFR 778.9.17, .21-.23 (1950).
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    In 1961 and 1966, Congress made a few minor, nonsubstantive 
language changes and redesignated certain sections.\34\ In 1968, the 
Department updated part 778, principally to clarify the statutory 
references, update the amounts used to illustrate pay computations, and 
reorganize the provisions in part 778.\35\ Over the next several 
decades, the Department periodically made minor changes and updates to 
part 778.\36\
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    \34\ In 1961, Congress made nonsubstantive language changes to 
sections (d)(5) and (7). See Fair Labor Standards Amendments of 
1961, Public Law 87-30, 6, 75 Stat. 65, 70. In 1966, Congress 
redesignated section 7(d) as section 7(e). See Fair Labor Standards 
Amendments of 1966, Public Law 89-601, Title II, Sec.  204(d)(1), 80 
Stat. 830, 836. Additionally, section 7(g), which provided that 
extra compensation paid pursuant to sections 7(d)(5), (6), and (7) 
could be credited against overtime compensation due under section 
7(a), was moved to section 7(h). See id.
    \35\ See 33 FR 986 (Jan. 26, 1968) (29 CFR 778.0-.603).
    \36\ See 36 FR 4699 (Mar. 11, 1971) (updating Sec.  778.214 to 
clarify that advance approval by the Department is not required for 
plans providing benefits within the meaning of section 7(e)(4)); 36 
FR 4981 (Mar. 16, 1971) (updating Sec.  778.117 to clarify 
commission payments that must be included in the regular rate); 46 
FR 7308 (Jan. 23, 1981) (updating part 778 to increase the dollar 
amounts used as examples in the regulations, to respond to statutory 
amendments affecting other parts of the FLSA, and to modify Sec.  
778.320 to clarify that pay for nonworking time does not 
automatically convert such time into hours worked); 46 FR 33516 
(June 30, 1981) (correcting errors in the January 1981 update in 
Sec. Sec.  778.323, .327, .501, .601); 56 FR 61100 (Nov. 29, 1991) 
(updating Sec.  778.603 to address statutory amendment adding 
section 7(q) regarding maximum-hour exemption for employees 
receiving remedial education).

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[[Page 11891]]

    In 2000, Congress added one additional category of payments that 
could be excluded from the regular rate, currently found in section 
7(e)(8).\37\ This amendment permitted an employer to exclude from the 
regular rate income derived from a stock option, stock appreciation 
right, or employee stock purchase plan, provided certain restrictions 
were met.\38\ In the 2000 amendments, Congress also amended section 
7(h) to state that, except for the types of extra compensation 
identified in sections 7(e)(5), (6), and (7), sums excluded from the 
regular rate are not creditable toward minimum wage or overtime 
compensation due.\39\ In 2011, the Department updated part 778 to 
reflect the 2000 statutory amendments and to modify the wage rates used 
as examples to reflect the current minimum wage.\40\
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    \37\ See Worker Economic Opportunity Act, Public Law 106-202, 
2(a)(3), 114 Stat. 308 (2000).
    \38\ See id.
    \39\ See id.
    \40\ See 76 FR 18832 (Apr. 5, 2011) (updating Sec. Sec.  
778.110, .111, .113, .114, .200, .208).
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    Currently, the FLSA's definition of ``regular rate'' and the eight 
categories of excludable payments are contained in section 7(e) of the 
Act.\41\ The Department's regulations concerning the regular rate 
requirements are contained in 29 CFR part 778. As noted above, the last 
comprehensive revision to part 778 was in 1968.\42\
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    \41\ See 29 U.S.C. 207(e). Additionally, section 7(h) states 
that only payments excludable from the regular rate pursuant to 
sections 7(e)(5), (6), and (7) may be credited against the 
employer's overtime obligation and that all other excludable 
payments (i.e., payments that qualify as excludable under sections 
7(e)(1), (2), (3), (4), and (8)) are not creditable. See 29 U.S.C. 
207(h).
    \42\ See 33 FR 986 (29 CFR 778.0-.603).
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    Under certain circumstances, the FLSA permits employers to use a 
``basic rate,'' rather than the regular rate as defined in section 
7(e), to calculate overtime compensation.\43\ Congress added this 
provision, which is currently in section 7(g), in 1949 (at the same 
time that Congress added the definition of ``regular rate'' to the 
FLSA).\44\ The requirements an employer must meet to use a basic rate 
are set forth in that same section 7(g).\45\
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    \43\ 29 U.S.C. 207(g).
    \44\ See Public Law 81-393, 63 Stat. at 914-15. In 1966, 
Congress redesignated section 7(f) as section 7(g), with section 
numbers (1)-(3) remaining the same; no substantive changes were 
made. See Public Law 89-601, 80 Stat. at 836. 1 29 U.S.C. 207(g)(1)-
(3).
    \45\ See id.
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    In 1955, the Department promulgated 29 CFR part 548 to establish 
the requirements for authorized basic rates under section 7(g)(3).\46\ 
It amended various sections of the part 548 regulations several times 
over the next 12 years to reflect statutory amendments to other parts 
of the FLSA, including increases to the minimum wage.\47\ The 
Department has not updated any of the regulations in part 548 since 
1967, more than a half-century ago.
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    \46\ See 20 FR 5679 (Aug. 6, 1955). The regulations interpreting 
sections 7(g)(1)-(2) are at 29 CFR 778.415-.421.
    \47\ See 21 FR 338 (Jan. 18, 1956); 26 FR 7731 (Aug. 18, 1961); 
28 FR 11266 (Oct. 22, 1963); 31 FR 6769 (May 6, 1966); 32 FR 3293 
(Feb. 25, 1967).
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III. Proposed Regulatory Revisions

    The Department proposes to update regulations in part 778 and part 
548 to both clarify the Department's interpretations in light of modern 
compensation and benefits practices. The sections below discuss, in 
turn, each category of excludable compensation that the Department 
proposes to address.

A. Excludable Compensation Under Section 7(e)(2)

    Many of the proposed updates would clarify the type of compensation 
that is excludable from the regular rate under FLSA section 7(e)(2). 
Section 7(e)(2) permits an employer to exclude from the regular rate 
three categories of payments: First, ``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''; second, ``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 third, 
``other similar payments to an employee which are not made as 
compensation for his hours of employment.'' \48\
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    \48\ 29 U.S.C. 207(e)(2).
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    Section 7(e)(2) contains three separate clauses, each of which 
addresses a distinct category of excludable compensation. For purposes 
of this NPRM, the Department will refer to these clauses as the 
``occasional periods when no work is performed'' clause; the 
``reimbursable expenses'' clause; and the ``other similar payments'' 
clause. The Department's regulations interpreting section 7(e)(2) are 
contained in Sec. Sec.  778.216-.224.
1. Pay for Forgoing Holidays or Leave
    The initial clause of section 7(e)(2) permits an employer to 
exclude ``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'' from the regular 
rate.\49\ Section 778.218 addresses this statutory provision and 
provides that when payments for such time ``are in amounts 
approximately equivalent to the employee's normal earnings,'' they are 
not compensation for hours of employment and are therefore excludable 
from the regular rate.\50\
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    \49\ 29 U.S.C. 207(e)(2).
    \50\ 29 CFR 778.218(a). See FOH 32d03g (``Payment for absences 
charged against leave under a bona fide plan granting the employee a 
specified amount of annual, vacation, or sick leave with pay need 
not be included in the regular rate of pay, if the sum paid is the 
approximate equivalent of the employee's normal earnings for a 
similar period of working time. Payments for such absences may be 
excluded regardless of when or how the leave is taken.'').
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    Section 778.219 addresses a related issue, the exclusion of 
payments for working on a holiday or forgoing vacation leave, as 
distinct from the exclusion of payments for using leave.\51\ It 
explains that if an employee who is entitled to ``a certain sum as 
holiday or vacation pay, whether he works or not,'' receives additional 
pay for each hour worked on a holiday or vacation day, the sum 
allocable as the holiday or vacation pay is excluded from the regular 
rate.\52\ In other words, when an employee works instead of taking a 
holiday or using vacation leave, and receives pay for the holiday or 
vacation leave that he or she did not take in addition to receiving pay 
for the hours of work performed, the amount paid for the forgone 
holiday or vacation leave may be excluded from the regular rate. 
Section 778.219 addresses only pay for forgoing holidays and vacation 
leave; it does not address sums paid for forgoing the use of other 
forms of leave, such as leave for illness.
---------------------------------------------------------------------------

    \51\ See 29 CFR 778.219.
    \52\ 29 CFR 778.219(a).
---------------------------------------------------------------------------

    WHD has addressed payment for forgoing sick leave in its Field 
Operations Handbook (FOH). The FOH states that the same rules governing 
exclusion of payments for unused vacation leave also apply to payments 
for unused sick leave.\53\ Accordingly, when ``the sum paid for unused 
sick leave is the approximate equivalent of the employee's normal 
earnings for a similar period of working time,'' such

[[Page 11892]]

payments are excludable from the regular rate.\54\
---------------------------------------------------------------------------

    \53\ See FOH 32d03e.
    \54\ Id.
---------------------------------------------------------------------------

    To clarify and modernize the regulations, the Department proposes 
to update Sec.  778.219 to address payments for forgoing both holidays 
and other forms of leave. The Department is aware that many employers 
no longer provide separate categories of leave based on an employee's 
reason for taking leave--such as sick leave and vacation leave. 
Instead, employers provide one category of leave, which is commonly 
called paid time off. The Department sees no reason to distinguish 
between the types of leave when determining whether payment for 
forgoing use of the leave is excludable from the regular rate. Rather, 
the central issues are whether the amount paid is approximately 
equivalent to the employee's normal earnings for a similar period of 
time, and whether the payment is in addition to the employee's normal 
compensation for hours worked.
    Accordingly, the Department proposes to clarify that occasional 
payments for forgoing the use of leave are treated the same regardless 
of the type of leave. The Department therefore proposes to revise the 
title of Sec.  778.219, clarify in Sec.  778.219(a) that payments for 
all forms of unused leave are treated the same for purposes of 
determining whether they may be excluded from the regular rate, and add 
an example concerning payment for forgoing the use of paid time off. 
The proposed changes reflect the Department's longstanding practice of 
applying the same principles to payments of unused holiday, vacation, 
and sick leave.\55\ The proposed changes would ensure the consistent 
application of the same principles across differing leave 
arrangements.\56\ The Department also proposes to clarify that payments 
for forgoing the use of leave are excludable from the regular rate 
regardless of whether they are paid during the same pay period in which 
the previously scheduled leave is forgone or during a subsequent pay 
period as a lump sum.\57\
---------------------------------------------------------------------------

    \55\ See id.
    \56\ See, e.g., Balestrieri v. Menlo Park Fire Protec. Dist., 
800 F.3d 1094, 1103 (9th Cir. 2015) (holding that annual leave 
comprised of both sick and vacation leave need not be included in 
the regular rate under section 7(e)(2)). Such payments need not be 
included in the regular rate under section 7(e)(2) for the same 
reason that payments for unused vacations or holidays need not be 
included; it makes no difference that payments for unused annual 
leave or paid time off may include unused sick leave. See also 
Opinion Letter FLSA2006-18NA, 2006 WL 4512960 (July 24, 2006) 
(holiday payments made to employees when they forgo holidays need 
not be included in the regular rate pursuant to section 7(e)(2)); 
Opinion Letter FLSA2004-2NA, 2004 WL 5303030 (Apr. 5, 2004) (cashed-
out accrued vacation time need not be included in regular rate 
pursuant to section 7(e)(2)).
    \57\ In some situations, employers may make payments to 
encourage attendance at work rather than compensating employees for 
forgoing the use of leave. Section 7(e)(3)(a) permits the exclusion 
of discretionary bonuses from the regular rate, but requires, among 
other things, that such bonus not be made ``pursuant to any prior 
contract, agreement, or promise causing the employee to expect such 
payments regularly[.]'' 29 U.S.C. 207(e)(3). As an example, Sec.  
778.211(c) states that an attendance bonus promised to employees to 
induce them to remain with the firm or to work more steadily, 
rapidly, or efficiently is not excludable from the regular rate. The 
proposed clarification to Sec.  778.219(a) would not affect Sec.  
778.211(c), which addresses the exclusion of discretionary bonuses 
from the regular rate pursuant to FLSA section 7(e)(3)(a). See 29 
U.S.C. 207(e)(3)(a); 29 CFR 778.211(c). The facts of each case 
determine whether a payment is, in fact, for unused leave and 
therefore excludable or whether the payment is made as an attendance 
bonus that is required to be included in the regular rate. For 
example, WHD has stated in guidance that where a collective 
bargaining agreement provided that `` `[a]ll employees will be 
eligible for a stipend for perfect attendance,' '' the payment, 
although described as a ``stipend for nonuse of sick leave,'' in 
fact constituted an attendance bonus under Sec.  778.211(c) and 
therefore was required to be included in the regular rate. Opinion 
Letter FLSA2009-19, 2009 WL 649021 (Jan. 16, 2009).
---------------------------------------------------------------------------

2. Compensation for Bona Fide Meal Periods
    As noted above, Sec.  778.218 addresses the clause of FLSA section 
7(e)(2) concerning payments made for occasional periods when no work is 
performed and provides that when payments for such time ``are in 
amounts approximately equivalent to the employee's normal earnings,'' 
they are not compensation for hours of employment and may be excluded 
from the regular rate.\58\ Section 778.218(b) states that this clause 
``deals with the type of absences which are infrequent or sporadic or 
unpredictable'' and ``has no relation to regular `absences' such as 
lunch periods nor to regularly scheduled days of rest.'' \59\
---------------------------------------------------------------------------

    \58\ 29 CFR 778.218; see 29 U.S.C. 207(e)(2).
    \59\ 29 CFR 778.218(b).
---------------------------------------------------------------------------

    Section 778.320 addresses ``hours that would not be hours worked if 
not paid for,'' and identifies ``time spent in eating meals between 
working hours'' as an example.\60\ Section 778.320(b) further states 
that even when such time is compensated, the parties may agree that the 
time will not be counted as hours worked.
---------------------------------------------------------------------------

    \60\ See 29 CFR 778.320.
---------------------------------------------------------------------------

    The Department proposes to remove the reference to ``lunch 
periods'' in Sec.  778.218(b) to eliminate any uncertainty about its 
relation to Sec.  778.320 concerning the excludability of payments for 
bona fide meal periods from the regular rate. As one court noted, the 
existing regulations in Sec. Sec.  778.218 and 778.320 ``appear 
somewhat inconsistent'' on the excludability from the regular rate of 
compensation for bona fide meal periods.\61\ In 1986, WHD acknowledged 
in an opinion letter ``that the reference to meal periods in section 
778.218(b) of Part 778 may not be compatible with the position which is 
contained in section 778.320(b),'' and indicated that the issue was 
under review.\62\ The Department subsequently clarified in a 1996 
opinion letter that pay provided for a bona fide meal period is 
excludable from the regular rate under Sec.  778.320(b).\63\ While the 
Department clarified its position in an opinion letter more than 20 
years ago, the Department is nonetheless concerned that the language in 
Sec.  778.218(b) may cause confusion concerning the excludability of 
pay for bona fide meal periods. Thus, to remove any ambiguity and to 
codify its interpretation in regulation, the Department proposes to 
delete the reference to ``lunch periods'' from Sec.  778.218(b).
---------------------------------------------------------------------------

    \61\ Smiley, 839 F.3d at 331 n.5.
    \62\ WHD Opinion Letter FLSA-937 (July 22, 1986).
    \63\ See WHD Opinion Letter, 1996 WL 1031805 (Dec. 3, 1996); see 
also Ballaris v. Wacker Siltronic Corp., 370 F.3d 901, 909 (9th Cir. 
2004) (holding that pay for a bona fide lunch period was ``properly 
excluded from the calculation of the regular rate under 29 U.S.C. 
207(e)(2) as interpreted by revised section 778.320''); WHD Opinion 
Letter, 1997 WL 998021 (July 21, 1997) (stating that pay for bona 
fide meal periods need not be included in the regular rate).
---------------------------------------------------------------------------

    Bona fide meal periods are not considered ``hours worked'' for 
purposes of the FLSA's minimum wage or overtime requirements, and 
employers are not required to pay for such time.\64\ The Department 
proposes changing Sec.  778.320 to clarify that the payment of 
compensation for bona fide meal periods alone does not convert such 
time to hours worked unless agreement or actual course of conduct 
establish that the parties have treated the time as hours worked. In 
the Department's enforcement experience, the treatment of bona fide 
meal breaks is frequently not subject to formal agreement and is often 
established by informal policy or course of conduct. Payments for such 
periods need only be included in the regular rate when it appears from 
all the pertinent facts that the parties have treated compensated bona 
fide meal periods as hours worked. This proposal clarifies the existing 
requirements and does not substantively change either the calculation 
of the regular rate or the determination of hours worked.
---------------------------------------------------------------------------

    \64\ See 29 CFR 785.19.

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[[Page 11893]]

3. Reimbursable Expenses
    The second clause of section 7(e)(2) excludes from the regular rate 
``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[.]'' \65\ The regulation in 
Sec.  778.217 states that ``[w]here an employee incurs expenses on his 
employer's behalf or where he is required to expend sums solely by 
reason of action taken for the convenience of his employer, section 
7(e)(2) is applicable to reimbursement for such expenses.'' \66\ The 
Department promulgated this section in February 1950.\67\
---------------------------------------------------------------------------

    \65\ 29 U.S.C. 207(e)(2).
    \66\ 29 CFR 778.217(a).
    \67\ See 15 FR 623.
---------------------------------------------------------------------------

    While Sec.  778.217 limits reimbursable expenses to those 
``solely'' in the interest of the employer, the statutory language does 
not include this limitation. Instead, the FLSA simply excludes all 
expenses incurred ``in the furtherance of [the] employer's 
interests[,]'' \68\ and, as explained further below, neither the 
Department nor the courts have since restricted excludable expenses to 
only those that ``solely'' benefit the employer. The Department is 
concerned that this single use of the word ``solely'' in Sec.  778.217 
may be interpreted as more restrictive than what the FLSA actually 
requires. The Department therefore proposes to remove the word 
``solely'' from Sec.  778.217(a) to clarify its interpretation of the 
reimbursable expenses clause of section 7(e)(2). This clarification is 
consistent with the other subsections of Sec.  778.217, as well as 
court rulings and the Department's opinion letters--which have not 
required that excludable expenses solely benefit the employer.
---------------------------------------------------------------------------

    \68\ 29 U.S.C. 207(e)(2).
---------------------------------------------------------------------------

    Section 778.217(d) also discusses expenses that are excludable from 
the regular rate. It emphasizes only whether such payments benefit the 
employer or the employee; it does not require them to ``solely'' 
benefit one party or the other. Thus, payments for expenses that are 
``incurred by the employee on the employer's behalf or for his benefit 
or convenience'' merit exclusion from the regular rate, but 
reimbursements for expenses ``incurred by the employee for his own 
benefit,'' such as ``expenses in traveling to and from work, buying 
lunch, paying rent, and the like,'' are not excluded from the regular 
rate.\69\
---------------------------------------------------------------------------

    \69\ 29 CFR 778.217(d). This is consistent with the illustrative 
examples in Sec.  778.217(b) of reimbursable expenses that may be 
excluded from the regular rate, which include ``purchasing supplies, 
tools, materials, or equipment on behalf of his employer,'' travel 
expenses, including living expenses away from home, incurred while 
traveling for work for the employer's benefit, and the cost of 
``supper money'' to an employee in a situation where ``he or she 
would ordinarily leave work in time to have supper at home, but 
instead must remain to work additional hours for the employer's 
benefit.'' See 29 CFR 778.217(b)(1), (b)(2), (b)(4).
---------------------------------------------------------------------------

    Similarly, the Department's opinion letters do not analyze whether 
an expense is incurred solely for the employer's convenience when 
discussing whether it may be excluded from the regular rate. Instead, 
the opinion letters analyze simply whether expenses benefit the 
employer.\70\ Furthermore, since 1955, the Department's policy in WHD's 
FOH has mirrored the statutory requirement that ``expenses incurred by 
an employee in furtherance of his/her employer's interests'' may be 
excluded from the regular rate, regardless of whether they ``solely'' 
benefit one party or the other.\71\
---------------------------------------------------------------------------

    \70\ For example, the cost of food for eating meals during 
travel out of town for work is for the employer's benefit; 
therefore, such reimbursement may be excluded from the regular rate. 
See Opinion Letter FLSA2004-3, 2004 WL 2146923 (May 13, 2004); see 
also Opinion Letter FLSA-828 (July 19, 1976) (``[r]eimbursement to 
an employee for expenses incurred on behalf of an employer'' would 
not become part of the regular rate); Opinion Letter FLSA-940 (Mar. 
9, 1977) (regular rate shall not include ``reimbursement for 
expenses where an employee incurs out of pocket expenses on the 
employer's behalf''); Opinion Letter FLSA-1234 (July 12, 1985) 
(reimbursement must be for ``expenses incurred by the employee on 
the employer's behalf or convenience'').
    \71\ FOH 32d05a(a).
---------------------------------------------------------------------------

    Consistent with the Department's practice and guidance, courts have 
not analyzed whether the expenses at issue were incurred solely for the 
employer's convenience when determining whether they are excludable 
from the regular rate. Instead, courts have emphasized the statutory 
requirement that the expenses need only benefit the employer.\72\
---------------------------------------------------------------------------

    \72\ See, e.g., Berry v. Excel Grp., Inc., 288 F.3d 252, 253-54 
(5th Cir. 2002) (concluding that reimbursements of travel expenses 
were primarily for the employer's benefit; therefore, such expenses 
were excluded from the regular rate); see also Brennan v. Padre 
Drilling Co., Inc., 359 F. Supp. 462, 465 (S.D. Tex. 1973) (per diem 
for traveling expenses is ``expended by the employee in the 
furtherance of his employer's interest''); Sharp v. CGG Land, Inc., 
840 F.3d 1211, 1215 (10th Cir. 2016) (``the proper focus under 
section 778.217(b)(3) is whether the $35 payments are for 
reimbursement of travel expenses incurred in furtherance of the 
employer's interests'').
---------------------------------------------------------------------------

    The Department also proposes to clarify section 7(e)(2)'s 
requirement that only ``reasonable'' and ``properly reimbursable'' 
expenses may be excluded from the regular rate when reimbursed. Current 
Sec.  778.217(b)(3) permits employers to exclude from the regular rate 
``[t]he actual or reasonably approximate amount expended by an employee 
who is traveling `over the road' on his employer's business, for 
transportation . . . and living expenses away from home, [or] other 
[such] travel expenses[.]'' Section 778.217(c) cautions that ``only the 
actual or reasonably approximate amount of the expense is excludable 
from the regular rate. If the amount paid as `reimbursement' is 
disproportionately large, the excess amount will be included in the 
regular rate.''
    The Department proposes additional explanation on what is 
``reasonable''--and thus not ``disproportionately large''--by referring 
to the Federal Travel Regulation. The Department believes that the 
amounts set in the Federal Travel Regulation are not excessive and are 
easily ascertained, given its ``two principal purposes'' of 
``balanc[ing] the need to assure that official travel is conducted in a 
responsible manner with the need to minimize administrative costs'' and 
``communicat[ing] the resulting policies in a clear manner to Federal 
agencies and employees.'' \73\ The Department thus proposes to add 
regulatory text explaining that a payment for an employee traveling on 
his or her employer's business is per se reasonable if it is at or 
beneath the maximum amounts reimbursable or allowed for the same type 
of expense under the Federal Travel Regulation and meets Sec.  
778.217's other requirements. Those other requirements include that the 
reimbursement be for the ``actual or reasonably approximate amount'' 
\74\ of the expense, that the expense be incurred on the employer's 
behalf, and that the expense not vary with hours worked.\75\ The 
proposed regulatory text also clarifies that a reimbursement for an 
employee traveling on his or her employer's business exceeding the 
Federal Travel Regulation limits is not necessarily unreasonable. This 
is so because a payment may be more than that required ``to minimize 
administrative costs'' yet still within the

[[Page 11894]]

realm of reasonable business and industry norms.
---------------------------------------------------------------------------

    \73\ 41 CFR 300-1.2. Those amounts are published online annually 
by the General Services Administration. See GSA, Plan and Book, 
www.gsa.gov/travel/plan-and-book.
    \74\ Gagnon v. United Technisource, Inc., 607 F.3d 1036, 1041-42 
(5th Cir. 2010), provides a helpful contrast to a properly 
excludable reimbursement. There, multiple facts indicated that the 
employee's purported ``per diem'' was simply a scheme to avoid 
paying overtime. Those facts included the per diem's rise over time 
without any clear connection to travel or other expenses, its 
variance by the hour, its cap at 40 hours per week, and its payment 
in combination with a well-below-market wage.
    \75\ See, e.g., Baouch v. Werner Enters., Inc., 908 F.3d 1107, 
1116 (8th Cir. 2018) (``Per diem payments that vary with the amount 
of work performed are part of the regular rate.'').
---------------------------------------------------------------------------

4. Other Similar Payments
    Section 7(e) requires ``all remuneration for employment'' be 
included in the regular rate, subject to that section's eight listed 
exclusions. Section 7(e)(2) consists of three clauses, each of which 
address a distinct category of excludable compensation. As discussed 
above, the first excludes ``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.'' The 
second excludes ``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 employee.'' The third clause 
excludes ``other similar payments to an employee which are not made as 
compensation for his hours of employment.''
    ``[O]ther . . . payments'' are ``similar'' to those in the first 
two clauses because they are ``not made as compensation for [an 
employee's] hours of employment.'' The first two clauses share the 
essential characteristic of having no connection to the quantity or 
quality of work performed. The ``other similar payments'' clause thus 
should exclude payments not tied to an employee's hours worked, 
services rendered, job performance, credentials, or other criteria 
linked to the quality or quantity of the employee's work.\76\
---------------------------------------------------------------------------

    \76\ See Reich v. Interstate Brands Corp., 57 F.3d 574, 578 (7th 
Cir. 1995) (The word ``similar'' in Section 7(e)(2) refers to other 
payments that do not depend at all on when or how much work is 
performed''); Minizza v. Stone Container Corp., 842 F.2d 1456, 1462 
(3d Cir. 1988) (payments under Section 7(e)(2) all ``share the 
essential characteristic . . . of not being compensation for hours 
worked or services rendered'').
---------------------------------------------------------------------------

    In a sense, every benefit or payment given an employee is 
``remuneration for employment.'' \77\ Certainly benefits like paid 
vacation or sick leave are seen as such by many employers and 
employees. But the section 7(e)(2) exclusions make clear that whether 
or not they are remuneration, they are ``not made as compensation for 
[the employee's] hours of employment'' because they have no 
relationship to the employee's hours worked or services rendered. This 
interpretation gives meaning to the third clause. It allows employers 
to provide benefits unconnected to the quality or quantity of work, 
even if those benefits are remuneration of a sort.
---------------------------------------------------------------------------

    \77\ Cf. Minizza, 842 F.2d at 1460 (``Employers have a finite 
amount to spend for the labor component of their product or service. 
This sum can be allocated solely as compensation on an hourly basis 
(in which event the payment would be fully includable in the 
`regular rate'), or it can assume any number of other forms . . . 
(in which case the payments may or may not be includable), in any 
ratio the parties care to set.'').
---------------------------------------------------------------------------

    Interpreting the third clause as simply a restatement of the 
``remuneration'' requirement would contravene basic principles of 
statutory interpretation.\78\ Such an interpretation would equate the 
unique phrases ``all remuneration for employment'' and ``compensation 
for [the employee's] hours of employment,'' even though Congress used 
different words and thus, presumably, meant different things. This is 
especially so when considering that one phrase uses the word 
``employment'' when the other uses the term ``hours of employment.'' 
Such an interpretation would also render the third clause redundant, 
another disfavored result. And it would be difficult to reconcile with 
the first clause of section 7(e)(2), in which the payments are clearly 
remuneration yet excludable from the regular rate.
---------------------------------------------------------------------------

    \78\ See Reich, 57 F.3d at 578 (``The word `similar' then refers 
to other payments that do not depend at all on when or how much work 
is performed.''); Minizza, 842 F.2d at 1462. (``[W]e interpret the 
phrase `other similar payments' by reading each clause of section 
207(e)(2) separately. The phrase `other similar payments . . . not 
made as compensation for hours of employment' does not mean just 
other payments for idle hours or reimbursements, the two types of 
payments set forth in the two preceding clauses of the section, but 
payments not tied to hours of compensation, of which payments for 
idle hours and reimbursements are only two examples.'') But see 
Flores v. City of San Gabriel, 824 F.3d 890, 899 (9th Cir. 2016) 
(``the `key point' '' for exclusion under the third clause ``is 
whether the payment is `compensation for work' '' (quoting Local 246 
Utility Workers Union of Am. v. S. Cal. Edison Co., 83 F.3d 292, 295 
(9th Cir. 1996)); Acton v. City of Columbia, Mo., 436 F.3d 969, 976 
(8th Cir. 2006) (``Section 207(e)(2), properly understood, operates 
not as a separate basis for exclusion, but instead clarified the 
types of payments that do not constitute remuneration for employment 
for purposes of section 207.'').
---------------------------------------------------------------------------

    With that said, ``other similar payments'' cannot be simply wages 
in another guise, as some lump-sum, formula-based cash payments are. 
When a payment is a wage supplement, even if not tied directly to 
employee performance or hours, it is still compensation for ``hours of 
employment.''
    Payments to employees are not excludable under the ``other similar 
payments'' clause merely because the payments are not specifically tied 
to an employee's hours of work.\79\ For example, payments such as 
production bonuses,\80\ and the cost of furnished board, lodging, or 
facilities,\81\ which ``though not directly attributable to any 
particular hours of work are, nevertheless, clearly understood to be 
compensation for services'' \82\ are not excludable under this 
provision. Payments that differ only in form from regular wages by, for 
instance, being paid in a monthly lump sum or as hardship premiums, are 
better characterized as wages or bonuses than as ``other similar 
payments'' excludable from the regular rate. The other similar payments 
clause cannot be interpreted so broadly as to ``obliterat[e] the 
qualifications and limitations'' placed on excludable payments 
specifically addressed in section 7(e)'s various other sections, which 
could render such limits ``superfluous.'' \83\
---------------------------------------------------------------------------

    \79\ See Local 246 Utility Workers Union of Am. v. S. California 
Edison Co., 83 F.3d 292, 295 n.2 (9th Cir. 1996) (``Even if payments 
to employees are not measured by the number of hours spent at work, 
that fact alone does not qualify them for exclusion under 
7(e)(2).''); Featsent v. City of Youngstown, 70 F.3d 900, 904 (6th 
Cir. 1995) (``7(e)(2) does not exclude every payment not measured by 
hours of employment from the regular rate.''); Reich, 57 F.3d at 577 
(``We cannot read 7(e)(2) in isolation. . . . It is one among many 
exemptions, and a glance at a few of the others shows that 7(e)(2) 
cannot possibly exclude every payment that is not measured by the 
number of hours spent at work.'').
    \80\ See 29 CFR 778.211(c).
    \81\ See 29 CFR 778.116.
    \82\ 29 CFR 778.224(a).
    \83\ Reich, 57 F.3d at 578.
---------------------------------------------------------------------------

    The interpretation the Department states here has considerable 
support in the case law. The Third Circuit held in Minizza v. Stone 
Container Corp. that two lump sums paid to select employees to induce 
them to agree to a collective-bargaining agreement were excludable as 
an ``other similar payment'' because they were not compensation for 
hours worked or services rendered.\84\ The court interpreted the clause 
to exclude ``payments not tied to hours of compensation, of which 
payments for idle hours and reimbursements are only two examples.'' 
\85\ The court's decision that these payments were not compensation for 
employment rested in part on the fact that the ``eligibility 
requirements were not meant to serve as compensation for service, but 
rather to reduce the employer's costs,'' but also in part on the fact 
that ``the eligibility terms themselves [for the lump sums] [did] not 
require specific service''--it did ``not matter how many hours an 
employee worked during that period, nor how many hours he might work in 
the future.'' \86\
---------------------------------------------------------------------------

    \84\ Minizza, 842 F.2d 1456, 1462.
    \85\ Id. at 1461.
    \86\ Id. at 1460-61; see also id. at 1462 (``If the payments 
were made as compensation for hours worked or services provided, the 
payments would have been conditioned on a certain number of hours 
worked or on an amount of services provided.'').
---------------------------------------------------------------------------

    The Seventh Circuit espoused a similar understanding in Reich v. 
Interstate Brands Corp.\87\ The court held

[[Page 11895]]

that regular, planned $12 payments to bakers who worked weeks without 
two consecutive days off could not be excluded from the regular rate 
under section 7(e)(2). The court reasoned that the payments were 
materially no different from a higher base rate to compensate the 
bakers for taking on an unpleasant schedule.\88\ ``Other similar 
payments'' are different, wrote the court. ``The word `similar' . . . 
refers to other payments that do not depend at all on when or how much 
work is performed.'' \89\ Similarly, the Sixth Circuit has held that 
pay differentials based on employees' education level, shift 
differentials, and hazardous pay, are compensation for services 
rendered, unlike payments that ``are unrelated to [employees'] 
compensation for services and hours of service.'' \90\ Some circuit 
courts have interpreted the ``other similar payments'' to not exclude 
payments that are ``compensation for work.'' \91\ When these courts use 
these or similar phrases to capture the idea that the regular rate 
includes payments tied to work performance or that function as a wage 
supplement, they are correct. But insofar as they equate ``compensation 
for work'' with ``remuneration for employment,'' \92\ that is difficult 
to reconcile with the text of the FLSA. As explained above, the FLSA 
uses two different phrases, ``remuneration for employment'' and 
``compensation for hours of employment,'' each of which should be given 
unique content. And just as importantly, the first clause of section 
7(e)(2) excludes vacation and sick leave, which is clearly 
remunerative; ``other similar payments'' to them can be remunerative 
too.
---------------------------------------------------------------------------

    \87\ 57 F.3d 574.
    \88\ See id. at 578-79.
    \89\ Id. at 578.
    \90\ Featsent, 70 F.3d at 904-06.
    \91\ See e.g., Flores, 824 F.3d at 899.
    \92\ See Acton, 436 F.3d at 976 (``the language `not made as 
compensation for [the employee's] hours of employment' posited in 
Sec.  207(e)(2) is but a mere re-articulation of the `remuneration 
for employment' requirement set forth in the preambulary language of 
Sec.  207(e)'').
---------------------------------------------------------------------------

    The Department believes that its interpretation espoused here, and 
applied in some of the clarifications to the regulations proposed 
below, also promotes a clear yet flexible standard for employers and 
employees to order their affairs. Employers can understand the 
standard: Payments are ``other similar payments'' when they do not 
function as formulaic wage supplements and are not tied to hours 
worked, services rendered, job performance, credentials, longevity, or 
other criteria linked to the quality or quantity of the employee's 
work, but are conditioned merely on one being an employee. (Basic 
commonsense conditions, such as a reasonable waiting period for 
eligibility \93\ or the requirement to repay benefits as a remedy for 
employee misconduct, are permitted.) The standard also clarifies that 
there is space for a variety of creative benefits offerings, and 
encourages their provision to wide groups of employees instead of 
reserving them only for FLSA-exempt employees.
---------------------------------------------------------------------------

    \93\ See Minizza, 842 F.2d at 1460 (``A review of the 
eligibility terms reflects a requirement only that a payee achieve 
the status of an active employee for a specified period of time 
prior to receipt. It does not matter how many hours an employee 
worked during that period, nor how many hours he might work in the 
future.'').
---------------------------------------------------------------------------

    Section 778.224 of the regulations addresses miscellaneous items 
that are excludable from an employee's regular rate under the ``other 
similar payments'' clause of section 7(e)(2) because they are ``not 
made as compensation for . . . hours of employment[.]'' \94\ Section 
778.224(b) currently provides the following brief, nonexhaustive set of 
examples of ``other similar payments'' excludable from an employee's 
regular rate: ``(1) Sums paid to an employee for the rental of his 
truck or car; (2) Loans or advances made by the employer to the 
employee; [and] (3) The cost to the employer of conveniences furnished 
to the employee such as parking space, restrooms, lockers, on-the-job 
medical care and recreational facilities.'' \95\ The Department added 
this set of examples to the part 778 regulations in 1950,\96\ and has 
not substantively amended them since. The regulation makes clear that 
``it was not considered feasible'' to provide an exhaustive list of 
excludable ``other similar payments'' given the ``variety of 
miscellaneous payments [that] are paid by an employer to an employee 
under peculiar circumstances.'' \97\
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    \94\ 29 U.S.C. 207(e)(2).
    \95\ 29 CFR 778.224(b).
    \96\ See 15 FR 632 (1950), codified at 29 CFR 778.7(g).
    \97\ 29 CFR 778.224(a).
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    The Department continues to believe that providing a comprehensive 
list of all ``other similar payments'' excludable under section 
7(e)(2)'s third clause is infeasible. The Department recognizes, 
however, that an updated list of examples would further help employers 
understand their legal obligations by addressing some of the innovative 
changes in compensation practices and workplace environments that have 
occurred over the last 69 years. Accordingly, the Department proposes 
clarifying in Sec.  778.224(b) that the following items may be excluded 
from an employee's regular rate under the ``other similar payments'' 
clause of section 7(e)(2). Adding these clarifying examples may 
encourage employers to provide more of these types of benefits to their 
employees.
a. Specialist Treatment Provided Onsite
    The Department proposes clarifying in Sec.  778.224(b)(3) that 
employers may exclude from the regular rate the cost of providing 
onsite treatment from specialists such as chiropractors, massage 
therapists, personal trainers, counselors, Employment Assistance 
Programs, or physical therapists. Such specialist treatment resembles 
``on-the-job medical care,'' which Sec.  778.224(b)(3) already 
identifies as an excludable ``convenience furnished to the employee.'' 
\98\ Employers that provide onsite specialist treatment do so for a 
variety of reasons, including to raise workplace morale and promote 
employee health. Such treatment does not constitute compensation for 
hours of employment under section 7(e)(2).\99\
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    \98\ 29 CFR 778.224(b)(3).
    \99\ This proposal is not intended to affect the circumstances 
under which receiving medical attention is considered to be hours 
worked. See 29 CFR 785.43.
---------------------------------------------------------------------------

b. Gym Access, Gym Memberships, and Fitness Classes
    The Department proposes clarifying in Sec.  778.224(b)(3) that the 
cost of providing employees with gym access, gym memberships, and 
fitness classes, whether onsite or offsite, is excludable from the 
regular rate. These fitness benefits resemble ``recreational 
facilities,'' which Sec.  778.224(b)(3) already identifies as an 
excludable convenience provided to employees. According to one survey, 
a substantial number of employers provided fitness benefits.\100\ 
Employers may provide such conveniences for many reasons, including to 
raise workplace morale and promote employee health. The Department 
proposes to clarify that providing gym benefits and fitness classes is 
not included in the regular rate as compensation for hours of 
employment.\101\
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    \100\ See Soc'y for Human Res. Mgmt., ``2018 Employee Benefits: 
The Evolution of Benefits,'' at 23 (June 2018), https://www.shrm.org/hr-today/trends-and-forecasting/research-and-surveys/Documents/2018%20Employee%20Benefits%20Report.pdf.
    \101\ In circumstances where maintaining a certain level of 
physical fitness is a requirement of the employee's job, the cost to 
the employer of providing exercise opportunities is a facility 
``furnished primarily for the benefit or convenience of the 
employer,'' as described in Sec.  531.3(d). Facilities furnished for 
the employer's benefit do not qualify as wages or remuneration for 
employment and thus need not be included in the regular rate.

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[[Page 11896]]

c. Wellness Programs
    The Department proposes adding an example in Sec.  778.224(b)(4) to 
clarify that employers may exclude the cost of providing certain health 
promotion and disease prevention activities, often known as wellness 
programs. Examples of some common wellness programs include health risk 
assessments, biometric screenings, vaccination clinics (including 
annual flu vaccinations), nutrition classes, weight loss programs, 
smoking cessation programs, stress reduction programs, exercise 
programs, and coaching to help employees meet health goals.\102\ 
Wellness programs are often provided to employees enrolled in an 
employer-sponsored health insurance plan, but some employers offer 
wellness programs to employees regardless of their health insurance 
coverage.
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    \102\ See, e.g., Soc'y for Human Res. Mgmt., ``How to Establish 
and Design a Wellness Program,'' https://www.shrm.org/resourcesandtools/hr-topics/pages/howtoestablishanddesignawellnessprogram.asp (last accessed Jan. 2, 
2019).
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    Workplace wellness programs are similar to ``on-the-job medical 
care'' and ``recreational facilities,'' conveniences that the 
regulations already specify are excludable from an employee's regular 
rate.\103\ Employers may provide such programs to, for example, reduce 
health care costs, reduce health-related absenteeism, and improve 
employee health and morale. Such programs are not intended to 
constitute compensation for hours of employment.
---------------------------------------------------------------------------

    \103\ 29 CFR 778.224(b)(3).
---------------------------------------------------------------------------

d. Employee Discounts on Retail Goods or Services
    The Department proposes adding an example in Sec.  778.224(b)(5) to 
confirm that discounts on retail goods and services may be excluded 
from the regular rate of pay as long as they are not tied to an 
employee's hours worked or services rendered. According to one survey, 
many employers provide employees with an option to purchase these types 
of goods or services at a discounted price relative to their full 
retail value.\104\ Such discounts are commonly available to employees 
regardless of their quality or quantity of work, and it is solely the 
employees' choice whether to purchase anything under the discount. When 
these discounts are available to employees regardless of their hours 
worked or services rendered, and are not tied to any duties performed, 
they qualify as ``other similar payments'' under section 7(e)(2).\105\ 
Alternatively, employee discounts could constitute ``payments in the 
nature of gifts'' under section 7(e)(1), where they are not based on 
the number of hours worked and are not in the nature of 
compensation.\106\
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    \104\ See Soc'y for Human Res. Mgmt., ``2018 Employee Benefits: 
The Evolution of Benefits,'' at 31 (June 2018), https://www.shrm.org/hr-today/trends-and-forecasting/research-and-surveys/Documents/2018%20Employee%20Benefits%20Report.pdf (from 2014 to 
2018, employers offering an employee discount on company services 
ranged from 31% to 34%, and employers offering employer-sponsored 
personal shopping (e.g., retail) discounts ranged from 11% to 19%).
    \105\ See Reich, 57 F.3d at 578 (payments under Section 7(e)(2) 
are those ``that do not depend at all on when or how much work is 
performed''); Minizza, 842 F.2d at 1462 (payments under Section 
7(e)(2) all ``share the essential characteristic . . . of not being 
compensation for hours worked or services rendered'').
    \106\ See, e.g., Lemus v. Denny's Inc., No. 10cv2061-CAB, 2015 
WL 13740136, at *11 (S.D. Cal. July 31, 2015); Rau v. Darling's Drug 
Store, Inc., 388 F. Supp. 877, 879 (W.D. Pa. 1975).
---------------------------------------------------------------------------

    More than 50 years ago, the Department stated that such employee 
discounts are not included in the regular rate of pay. In a 1962 
opinion letter, the Department found that the value of ``concessions 
granted to employees . . . on charges for telephone service'' was ``not 
part of wages includible in the regular rate of pay''--in part because 
``[s]uch concessions appear to be similar to discounts on merchandise 
offered by many retail establishments to their employees which [the 
Department] do[es] not regard as wages.'' \107\ Discounts like these 
are not fungible cash but merely a lower price on the employer's 
offerings. They appeal only to the employees who want to use them and 
are limited to the offered selection of goods or services. Employees 
must expend their own funds to avail themselves of the discounts. The 
discounts are presumably limited in their value, since employers likely 
do not offer discounts that allow their employees to arbitrage large 
quantities of goods or otherwise materially harm the business of their 
employer. And employers may also place conditions on the discounts to 
protect their interests by, for instance, requiring that discounted 
restaurant meals be eaten on the premises to prevent abuse.\108\ These 
discounts are not intended to be compensation for hours of employment.
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    \107\ Opinion Letter, 1962 DOLWH LEXIS 217 (Oct. 31, 1962).
    \108\ See Rodriguez v. Taco Bell Corp., 896 F.3d 952, 954 
(2018).
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    This proposal, therefore, would confirm the excludability of 
employee discounts on retail goods and services from the regular rate 
of pay, provided they are not tied to an employee's hours worked. 
Section 7(e)(2) provides that only payments ``not made as compensation 
for [the employee's] hours of employment'' are excludable from the 
regular rate of pay.\109\
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    \109\ 29 U.S.C. 207(e)(2); see also 29 CFR 778.224(a).
---------------------------------------------------------------------------

e. Tuition and Other Benefits
    The Department is proposing to add an example in Sec.  
778.224(b)(5) clarifying that certain tuition programs offered by 
employers may be excludable from the regular rate. Some employers today 
offer discounts for online courses, continuing-education programs, 
modest tuition-reimbursement programs, programs for repaying 
educational debt, and the like. Such tuition programs have been the 
subject of litigation,\110\ and the Department believes more clarity in 
this area would be desirable. As long as tuition programs are available 
to employees regardless of their hours worked or services rendered, and 
are instead contingent merely on one's being an employee, the 
Department believes they would qualify as ``other similar payments'' 
under section 7(e)(2).\111\ The Department also believes that at least 
some tuition programs offered by employers may be excludable from the 
regular rate under section 7(e)(1) as ``sums paid as gifts.'' Finally, 
the Department is considering whether certain tuition programs may also 
be excludable under section 7(e)(4) if provided pursuant to a bona fide 
plan, and, as stated more fully below, seeks comment specifically on 
the nature of tuition benefits provided by employers.
---------------------------------------------------------------------------

    \110\ See White v. Publix Super Mkts., Inc., No. 3:14-cv-1189, 
2015 WL 4949837 (M.D. Tenn. Aug. 19, 2015); Adoma v. Univ. of 
Phoenix, Inc., 779 F. Supp. 2d 1126 (E.D. Cal. 2011).
    \111\ See Reich, 57 F.3d at 578 (payments under Section 7(e)(2) 
are those ``that do not depend at all on when or how much work is 
performed''); Minizza, 842 F.2d at 1462 (payments under Section 
7(e)(2) all ``share the essential characteristic . . . of not being 
compensation for hours worked or services rendered'').
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    The Department believes that tuition programs, in the main, 
function as the kinds of payments excludable under section 7(e)(2). 
Unlike wage supplements, these tuition programs are not fungible, any-
purpose cash, but must be directed toward particular educational and 
training opportunities. These programs are also optional, appeal only 
to those employees who want to use them, and are directed toward 
educational and training pursuits outside the employer's workplace. 
Such tuition programs do not meet the basic necessities of life, such 
as food, clothing, or shelter. While the educational benefit may result 
in employees better able to accomplish the employer's objectives, these 
programs are not directly connected to the

[[Page 11897]]

employees' day-to-day duties for the employer.
    Tuition programs could also potentially be ``sums paid as gifts,'' 
depending on their nature. Section 7(e)(1) excludes ``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.'' Because the first clause, ``sums paid as gifts,'' is 
separated from the second clause by a semi-colon, the first clause must 
address a separate set of excludable benefits from that in the second 
clause. There may be some overlap between ``sums paid as gifts'' and 
``payments in the nature of gifts made at Christmas time, on special 
occasions, or as a reward for services,'' but the categories are not 
coextensive.
    Specifically, sums under the first clause are those ``paid as 
gifts''--that is, paid with the express understanding that they are a 
gift--as opposed to sums under the second clause, which are not 
expressly given as a gift but are nevertheless ``in the nature of 
gifts'' because of their timing. The second clause in 7(e)(1) therefore 
expands the universe of excludable gifts from sums that are obviously 
``paid as gifts'' to include those that are also ``in the nature of 
gifts,'' but limits the latter category to those made at Christmas 
time, on special occasions, or as rewards for service. In either case, 
however, the payments must not be measured by or dependent on hours 
worked, production, or efficiency.\112\
---------------------------------------------------------------------------

    \112\ 29 CFR 778.212.
---------------------------------------------------------------------------

    Whether the Department ultimately excludes tuition programs from 
the regular rate in the final rule, and whether it does so under 
section 7(e)(1), (2), (4), or all or some of them, this proposed 
clarification excluding tuition programs from the regular rate would 
not affect the Department's regulations at Sec.  531.32 referencing 
``meals, dormitory rooms, and tuition furnished by a college to its 
student employees'' as an ``other facility.'' \113\ The college 
environment is a unique context in which learning, work, and daily 
living are inextricably connected, tightly knit, and often all provided 
by the same entity, that being the college.
---------------------------------------------------------------------------

    \113\ 29 CFR 531.32(a).
---------------------------------------------------------------------------

    The Department seeks comment on the following tuition-related 
questions: Are there other aspects of the FLSA, the Department's 
regulations, or parties' interactions with the Department that affect 
employers' and employees' conduct and that warrant consideration when 
it comes to making clear that tuition programs may be excluded from the 
regular rate? Do employers and employees feel that express regulatory 
clarification on excluding tuition programs from the regular rate would 
be helpful? Are employers hesitant to offer employees a tuition program 
because of concerns about legal compliance, litigation, or other issues 
related to the regular rate? What sorts of tuition programs are 
employers offering, and why are employers doing so? How do these 
tuition programs work? Are employers using bona fide third-party plans 
for tuition programs? What terms and conditions are employers setting 
on tuition programs? How are employers and employees benefiting from 
these tuition programs?
    The Department acknowledges that the above examples proposed for 
express exclusion from the regular rate are just a few of many types of 
compensation that are not compensation for work and therefore 
excludable under section 7(e)(2). The Department welcomes suggestions 
for any additional examples that the Department should add to Sec.  
778.224 to illustrate other similar payments that are not compensation 
for work. The Department also welcomes suggestions about whether any of 
the above examples are excludable under other provisions of section 
7(e). Finally, the Department welcomes suggestions about whether other 
sections in Part 778 should be updated to clarify that any of the 
above-referenced compensation is excludable from the regular rate under 
these or any other principles under section 7(e).
5. Show-Up Pay, Call-Back Pay, and Payments Similar to Call-Back Pay
    Section 778.220 excludes from the regular rate ``show-up'' or 
``reporting'' pay, which is defined as compensation for a specified 
minimum number of hours at the applicable straight-time or overtime 
rate on ``infrequent or sporadic'' occasions in which an employee is 
not provided with the expected amount of work after reporting as 
scheduled.\114\ Payments for hours actually worked are included in the 
regular rate; amounts beyond what the employee would receive for the 
hours worked are excludable.
---------------------------------------------------------------------------

    \114\ See 29 CFR 778.220.
---------------------------------------------------------------------------

    Section 778.221 addresses ``call-back'' pay. Call-back pay is 
additional compensation for calling an employee back to work without 
prearrangement to perform extra work after the employee's scheduled 
hours have ended. It is typically paid for a specified number of hours 
at the applicable straight-time or overtime rate.\115\ Call-back pay is 
treated the same as show-up pay under Sec.  778.220.
---------------------------------------------------------------------------

    \115\ See 29 CFR 778.221(a).
---------------------------------------------------------------------------

    Section 778.222 addresses ``other payments similar to `call-back' 
pay,'' which are ``extra payments made to employees on infrequent and 
sporadic occasions, for failure to give an employee sufficient notice 
to report for work on regular days of rest or outside of regular 
hours,'' and ``extra payments made on infrequent and sporadic occasions 
solely because an employee is called back to work before the expiration 
of a specified number of hours between shifts or tours, sometimes 
referred to as a `rest period.' '' \116\ Such time is treated the same 
as show-up pay under Sec.  778.220 and call-back pay under Sec.  
778.221. Sections 778.220, 778.221, and 778.222 require that the 
payments be ``infrequent and sporadic'' to be excludable from the 
regular rate.
---------------------------------------------------------------------------

    \116\ 29 CFR 778.222.
---------------------------------------------------------------------------

    As referenced above, show-up or reporting pay is paid when the 
employee is scheduled to work but the employer fails to provide the 
expected amount of work.\117\ As such, this type of payment is 
excludable under the first clause of section 7(e)(2), which excludes 
payments made for ``occasional periods'' when no work is performed due 
to the ``failure of the employer to provide sufficient work.'' \118\ 
Section 778.220 accordingly limits exclusion of such payments to when 
they are made ``on infrequent and sporadic occasions.'' \119\
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    \117\ Since 1940, the Department's position has been that show-
up pay that exceeded pay due for hours worked was meant to 
compensate the employee for the consumption of his time and 
discourage employers from calling in employees for only a fraction 
of a day. Interpretive Bulletin No. 4 ] 70(8).
    \118\ 29 U.S.C. 207(e).
    \119\ 29 CFR 778.220.
---------------------------------------------------------------------------

    Call-back pay and similar payments, in contrast, are not made for 
periods when the employer fails to provide sufficient work but are 
instead additional payments made to compensate the employee when the 
employer provides unanticipated work.\120\ As such, these payments do 
not fall under the first clause of section 7(e)(2). The Department has 
stated that call-back pay described in Sec.  778.221 and the other 
payments described in Sec.  778.222 instead fall under the ``other 
similar payments'' clause of section 7(e)(2)--which Congress did not 
restrict to ``occasional periods'' (unlike the first

[[Page 11898]]

clause of section 7(e)(2)).\121\ The FLSA does not require that 
payments under Sec. Sec.  778.221 and 778.222 be only ``occasional'' to 
be excluded from the regular rate. Accordingly, the Department proposes 
removing the regulatory restriction that requires the payments 
discussed in Sec. Sec.  778.221 and 778.222 to be ``infrequent and 
sporadic.'' \122\
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    \120\ 29 CFR 778.221-.222.
    \121\ See Opinion Letter FLSA-574 (Nov. 18, 1964) (``turn 
around'' payments excludable under third clause); Opinion Letter 
FLSA-933 (July 20, 1964) (payment for failure to provide rest period 
excludable under third clause); Opinion Letter (Jan. 1, 1964) 
(stating that extra payments ``made for recall to work outside of 
regular working hours and for shortened `rest periods' between 
shifts . . . may be excludable from the regular rate under the third 
clause'' of section 7(e)(2)).
    \122\ The Department is also proposing to update the reference 
to Sec.  778.222 that appears in Sec.  778.203(d).
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    Although the Department proposes removing the words ``infrequent 
and sporadic'' from Sec. Sec.  778.221 and 778.222, the Department 
still believes that payments excluded under these provisions should be 
``without prearrangement.'' \123\ For example, if an employer retailer 
called in an employee to help clean up the store for 3 hours after an 
unexpected roof leak, and then again 3 weeks later for 2 hours to cover 
for a coworker who left work for a family emergency, payments for those 
instances would be without prearrangement and any call-back pay that 
exceeded the amount the employee would receive for the hours worked 
would be excludable. However, when payments under Sec. Sec.  778.221 
and 778.222 are so regular that they, in effect, are prearranged, they 
are compensation for work. For example, if an employer restaurant 
called in an employee server for two hours of supposedly emergency help 
during the busiest part of Saturday evening for 6 weeks out of 2 months 
in a row, that would be essentially prearranged and all of the call-
back pay would be included in the regular rate. The Department 
therefore proposes to clarify that such payments under Sec. Sec.  
778.221 (``call-back'' pay) and 778.222 (other payments similar to 
``call-back'' pay) may be compensation for employment and therefore 
included in the regular rate. The Department further proposes to 
clarify that the regulations apply regardless of whether the 
compensation is pursuant to established practice, an employment 
agreement, or state or local law.
---------------------------------------------------------------------------

    \123\ 29 CFR 778.221; see also Stewart v. San Luis Ambulance 
Inc., No. CV 13-09458-BRO (SSX), 2015 WL 13684710, at *7 (C.D. Cal. 
Oct. 6, 2015) (call-back payments must be ``without 
prearrangement'').
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    The Department notes that certain states and localities regulate 
scheduling practices and impose a monetary penalty on employers (which 
is paid to employees) in situations analogous to those discussed in 
Sec. Sec.  778.220, 778.221, and 778.222.\124\ These state and local 
laws include certain penalties that potentially affect regular rate 
calculations. This includes, for example: (1) ``Reporting pay'' for 
employees who are unable to work their scheduled hours because the 
employer subtracted hours from a regular shift before or after the 
employee reports for duty; \125\ (2) ``clopening'' or ``right to rest'' 
pay for employees who work the end of one day's shift and the start of 
the next day's shift with fewer than 10 or 11 hours between the shifts, 
or who work during a rest period; \126\ (3) ``predictability pay'' for 
employees who do not receive the requisite notice of a schedule change; 
\127\ and (4) ``on-call pay'' for employees with a scheduled on-call 
shift but who are not called in to work.\128\ In light of these recent 
trends in state and local scheduling laws, the Department proposes to 
clarify the treatment of these penalty payments under the regulations.
---------------------------------------------------------------------------

    \124\ A number of state and local jurisdictions have introduced 
laws regulating scheduling practices in recent legislative sessions. 
See, e.g., H.B. 2467, 53rd Leg., 2d Reg. Sess. (Ariz. 2018); S.B. 
321, 2018 Reg. Sess. (Conn. 2018); H.B. 5046, 100th Gen. Assemb. 
(Ill. 2018); S.B. 1000, 190th Leg. (Mass. 2017-18); H.B. 1614, S.B. 
1116, 2017 Reg. Sess. (Md. 2017); S109, 218th Leg. (N.J. 2018); H.B. 
741, 2015 Sess. (N.C. 2015); H.B. 7515, 7634, Jan. Sess. A.D. 2016 
(R.I. 2016); Chi., Ill., Mun. Ordinance O2017-4947 (introduced June 
28, 2017); Employee Scheduling (Call-in Pay), N.Y. St. Reg. LAB. 47-
17-00011-P (proposed Nov. 11, 2017); S.B. 828, 73rd Leg. Assemb., 
2017 Reg. Sess. (Or. 2017).
    \125\ See, e.g., Seattle, Wash., Mun. Code 14.22.050 (2017).
    \126\ See, e.g., N.Y.C., Admin. Code 20-1231 (2017); Seattle, 
Wash., Mun. Code 14.22.035 (2017); Emeryville, Cal. Mun. Code 5-
39.06 (2017).
    \127\ See, e.g., S.F., Cal., Police Code art. 33G (2015); 
Emeryville, Cal., Mun. Code 5-39.01 (2017); N.Y.C., N.Y., Admin. 
Code 20-1201 (2017); Seattle, Wash., Mun. Code 14.22.050 (2017).
    \128\ See, e.g., S.F., Cal., Police Code art. 3300G.4(d) (2015); 
Seattle, Wash., Mun. Code 14.22.050. (2017).
---------------------------------------------------------------------------

    Reporting pay pursuant to state or local scheduling laws would be 
treated like show-up pay under Sec.  778.220 because it is payment for 
an employer's failure to provide expected work.\129\ Compensation for 
any hours actually worked are included in the regular rate; 
compensation beyond that may be excluded from the regular rate as 
payment to compensate the employee for time spent reporting to work and 
to prevent loss of pay from the employer's failure to provide expected 
work during regular hours.
---------------------------------------------------------------------------

    \129\ See, e.g., Seattle, Wash., Mun. Code 14.22.050 (2017).
---------------------------------------------------------------------------

    ``Clopening'' or ``right to rest'' pay under state or local 
scheduling laws would be analyzed under Sec.  778.222 and would 
therefore generally be excludable from the regular rate as long as the 
payments are not regular. The Department would also analyze 
``predictability pay'' penalties under Sec.  778.222, as they are 
analogous to payments for failure to give an employee sufficient notice 
to report for work outside of his or her regular work schedule. As with 
reporting and call-back pay, compensation ``over and above the 
employee's earnings for the hours actually worked at his applicable 
rate (straight-time or overtime, as the case may be), is considered as 
a payment that is not made for hours worked,'' and is therefore 
excludable from the regular rate.\130\
---------------------------------------------------------------------------

    \130\ 29 CFR 778.222.
---------------------------------------------------------------------------

    Finally, the Department proposes to analyze ``on-call pay'' 
scheduling penalties under Sec.  778.223, which is entitled ``[p]ay for 
non-productive hours distinguished.'' \131\ Under this regulation, the 
Department may require payment for ``on-call'' time to be included in 
the regular rate when such payments are ``compensation for performing a 
duty involved in the employee's job.'' \132\
---------------------------------------------------------------------------

    \131\ Id. 778.223.
    \132\ Id.
---------------------------------------------------------------------------

B. Discretionary Bonuses Under Section 7(e)(3)

    Section 7(e)(3) of the FLSA excludes from the regular rate ``sums 
paid in recognition of services performed'' if ``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.'' \133\ Section 778.211 
of the regulations implements this exclusion and provides additional 
details concerning the types of bonuses that qualify for this 
exclusion. The Department proposes to elaborate on the types of bonuses 
that are and those that are not discretionary in Sec.  778.211 to add 
clarity for employers and employees.
---------------------------------------------------------------------------

    \133\ 29 U.S.C. 207(e)(3).
---------------------------------------------------------------------------

    The Department proposes modifying language in Sec.  778.211(c) and 
adding a new paragraph (d) to clarify that, under longstanding 
principles, neither the label assigned to a bonus nor the reason it was 
paid conclusively determine whether it is discretionary under section 
7(e)(3).\134\ While attendance,

[[Page 11899]]

production, work quality, and longevity bonuses, as those terms are 
commonly used, are usually paid pursuant to a prior contract, 
agreement, or promise causing the employee to expect such payments 
regularly, and therefore are non-discretionary bonuses that must be 
included in the regular rate, there may be instances when a bonus that 
is labelled as one of these types of bonuses is not in fact promised in 
advance and instead the employer retains discretion as to the fact and 
amount of the bonus until at or near the end of the period to which the 
bonus corresponds. The Department proposes modifying the language in 
Sec.  778.211(c) and adding a new paragraph (d) to make clear that the 
label assigned to a bonus is not determinative. Instead, the terms of 
the statute and the facts specific to the bonus at issue determine 
whether a bonus is an excludable discretionary bonus. Under section 
7(e)(3), a bonus is discretionary and therefore excludable, regardless 
of what it is labelled or called, if both the fact that the bonus is to 
be paid and the amount are determined at the sole discretion of the 
employer at or near the end of the period to which the bonus 
corresponds and the bonus is not paid pursuant to any prior contract, 
agreement, or promise causing the employee to expect such payments 
regularly.
---------------------------------------------------------------------------

    \134\ See 29 U.S.C. 207(e)(3); Minizza v. Stone Container Corp., 
842 F.2d 1456, 1462 n.9 (3d Cir. 1988) (observing that ``what the 
payments are termed is not important''); Walling v. Harnischfeger 
Corp., 325 U.S. 427, 430 (1945) (``To discover [the regular] rate . 
. . we look not to contract nomenclature but to the actual 
payments.''); Donohue v. Francis Servs., Inc., No. Civ.A.04-170, 
2005 WL 1155860, at *1 (E.D. La. 2005) (denying an employer's 
summary judgment motion over ``amounts described as `discretionary 
bonuses' ''). This principle comports with longstanding 
interpretation of other FLSA provisions; see, e.g., 29 CFR 541.2 
(cautioning that ``[a] job title alone is insufficient to establish 
the exempt status of an employee'' under Section 13(a)(1) of the 
Act).
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    Additionally, the Department proposes to include in new section 
Sec.  778.211(d) examples of bonuses that may be discretionary to 
supplement the examples of bonuses that commonly are non-discretionary 
discussed in Sec.  778.211(c). Such bonuses may include, for example, 
employee-of-the-month bonuses, bonuses to employees who made unique or 
extraordinary efforts which are not awarded according to pre-
established criteria, severance bonuses, bonuses for overcoming 
stressful or difficult challenges, and other similar bonuses for which 
the fact and amount of payment is in the sole discretion of the 
employer until at or near the end of the periods to which the bonuses 
correspond and that are not paid ``pursuant to any prior contract, 
agreement, or promise causing the employee to expect such payments 
regularly.'' \135\ The Department recognizes that employers offer many 
differing types of bonuses to their employees, and that compensation 
practices will continue to evolve going forward. The Department 
therefore welcomes comment from the public about other common types of 
bonuses that the Department should address in Sec.  778.211.
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    \135\ See 29 U.S.C. 207(e)(2); see also Alonzo v. Maximus, Inc., 
832 F. Supp. 2d 1122, 1133 (C.D. Cal. 2011) (holding that bonuses to 
employees who ``made unique or extraordinary efforts and were not 
awarded according to pre-established criteria or pre-established 
rates'' were excludable) (internal quotation marks omitted); Opinion 
Letter FLSA2008-12, 2008 WL 5483051 (Dec. 1, 2008) (bonuses paid 
without prior promise or agreement to 911 dispatchers in recognition 
of high stress level of their job are excludable discretionary 
bonuses). See 29 U.S.C. 207(e)(2).
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C. Excludable Benefits Under Section 7(e)(4)

    FLSA section 7(e)(4) excludes from the regular rate ``contributions 
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.'' \136\ Section 
778.215(a)(2) explains that, among other things, that ``[th]e primary 
purpose of the plan must be to provide systematically for the payment 
of benefits to employees on account of death, disability, advanced age, 
retirement, illness, medical expenses, hospitalization, and the like.'' 
The Department proposes adding more examples of the types of modern 
benefit plans that may be excludable from the regular rate of pay. 
Specifically, the Department proposes to add examples for benefits on 
account of ``accident, unemployment, and legal services'' to Sec.  
778.215(a)(2). The addition of ``accident'' derives directly from 
section 7(e)(4), which expressly uses the term (even though the current 
regulations do not). The addition of benefits for unemployment and 
legal services reflects the Department's conclusion that, although 
employers may not have commonly offered these benefits when Congress 
enacted the FLSA in 1938,\137\ they are ``similar benefits'' to those 
expressly listed in section 7(e)(4).
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    \136\ 29 U.S.C. 207(e)(4).
    \137\ See Bureau of Labor Statistics, An Overview of Employee 
Benefits 20 (2005), https://www.bls.gov/careeroutlook/2005/summer/art02.pdf.
---------------------------------------------------------------------------

    First, like other specifically enumerated types of benefit plans 
under section 7(e)(4), these benefit plans typically provide monetary 
benefits that are ``specified or definitely determinable on an 
actuarial basis.'' \138\ Second, benefit plans for unemployment or 
legal services protect employees from events that are rare but 
statistically predictable and that could otherwise cause significant 
financial hardship, just as is the case with life insurance, accident 
insurance, and the catastrophic-protection provisions of life 
insurance. Third, benefit plans for unemployment or legal services 
offer financial help when an employee's earnings are (unemployment) or 
may be (legal services) materially affected, as is the case with the 
other benefit plans. Employees who retire, reach an older age, or 
suffer an accident or health issue may be unable to work, or have their 
ability to work affected.
---------------------------------------------------------------------------

    \138\ Sec.  778.215(a)(3)(i).
---------------------------------------------------------------------------

    The Department notes that other characteristics of the various 
types of plans excludable under section 7(e)(4) may differ, but they 
still remain ``similar'' for purposes of the statute. Under the plain 
text of the statute, excludable plans need not be related to physical 
health. Retirement benefits are excludable, for instance, even though 
an employee may choose to retire for reasons wholly unrelated to 
health. And excludable plans also need not be limited to benefits for 
rare or even uncommon events. Health insurance, for instance, often 
pays for everyday medical expenses, and retirement is an event 
typically planned years in advance. Moreover, the benefits listed in 
the statute may be subject to various forms of payment. Retirement 
benefits are often a recurring payment, while accident and health 
benefits can fluctuate, and a life insurance death benefit can be paid 
in a lump sum. Therefore, insofar as the proposed additional examples 
differ among themselves or among other expressly listed benefits by not 
all being related to physical health, or not all being for rare events, 
or not all being paid out the same way, those differences do not make 
the proposed examples not ``similar'' under the statute. Indeed, such 
differences are encompassed in the statutory examples themselves.
    Of course, these proposed examples, like the examples already 
provided in regulation and statute, would have to satisfy the other 
various requirements outlined in Sec.  778.215.\139\ These additions 
would simply help clarify that such plans are not categorically barred 
from qualifying for exclusion under section 7(e)(4). The Department 
welcomes comments and data on the prevalence and nature of these types 
of

[[Page 11900]]

programs and on whether there are other similar benefit plans that 
should be expressly included as examples.
---------------------------------------------------------------------------

    \139\ Section 778.215(a) contains five conditions all of which 
must be met in order for employer contributions to be excluded from 
the regular rate under 7(e)(4). 29 CFR 778.215(a)(1)-(5).
---------------------------------------------------------------------------

D. Overtime Premiums Under Sections 7(e)(5)-(7)

    FLSA sections 7(e)(5), (6), and (7) permit employers to exclude 
from the regular rate certain overtime premium payments made for hours 
of work on special days or in excess or outside of specified daily or 
weekly standard work periods.\140\ More specifically, section 7(e)(5) 
permits exclusion of premiums for ``hours worked in excess of eight in 
a day or in excess of the maximum workweek applicable to such employee 
[under section 7(a)] or in excess of the employee's normal working 
hours or regular working hours, as the case may be[.]'' \141\ Section 
7(e)(6) permits exclusion of premiums ``for work by the employee on 
Saturdays, Sundays, holidays, or regular days of rest, or on the sixth 
or seventh day of the workweek, where such premium rate is not less 
than one and one-half times the rate established in good faith for like 
work performed in nonovertime hours on other days[.]'' \142\ Section 
7(e)(7) permits exclusion of premiums ``in pursuance of an applicable 
employment contract or collective-bargaining agreement, for work 
outside of the hours established in good faith by the contract or 
agreement as the basic, normal, or regular workday (not exceeding eight 
hours) or workweek (not exceeding the maximum workweek applicable to 
such employee under subsection [7(a)], where such premium rate is not 
less than one and one-half times the rate established in good faith by 
the contract or agreement for like work performed during such workday 
or workweek.'' \143\ Additionally, section 7(h)(2) provides that extra 
compensation of the types described in sections 7(e)(5), (6), and (7) 
is creditable toward overtime compensation owed under section 
7(a).\144\ These are the only types of compensation excludable from the 
regular rate that are also creditable toward overtime 
compensation.\145\
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    \140\ Id. 207(e)(5)-(7).
    \141\ Id. 207(e)(5).
    \142\ Id. 207(e)(6).
    \143\ Id. 207(e)(7).
    \144\ See id. 207(h)(2).
    \145\  See 29 CFR 778.201(c).
---------------------------------------------------------------------------

    Sections 778.202, 778.203, 778.205, and 778.207 explain the 
requirements for excluding from the regular rate the overtime premiums 
described in sections 7(e)(5) and (6).\146\ Sections 778.202 and 
778.202(e) refer to extra premium payments paid pursuant to 
contracts.\147\ Similarly, Sec.  778.205 uses an example of an extra 
premium payment paid pursuant to an employment ``agreement,'' \148\ and 
Sec.  778.207(a) refers to ``contract premium rates[.]'' \149\
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    \146\ See id. 778.202, .203, .205, .207.
    \147\ See id. 778.202(a), (b), (e).
    \148\ Id. 778.205.
    \149\ Id. 778.207(a).
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    The Department proposes amending Sec. Sec.  778.202 and 778.205 to 
remove references to employment agreements and contracts in those 
sections to eliminate any confusion that the overtime premiums 
described in sections 7(e)(5) and (6) may be excluded only under 
written contracts or agreements. These regulatory clarifications are 
consistent with sections 7(e)(5) and (6) of the FLSA, neither of which 
requires that the overtime premiums be paid pursuant to a formal 
employment contract or collective bargaining agreement. Those statutory 
exclusions contrast with section 7(e)(7), which explicitly requires 
``an employment contract or collective-bargaining agreement'' to 
exclude premiums ``for work outside of the hours established in good 
faith by the contract or work agreement as the basic, normal, or 
regular workday (not exceeding eight hours) or workweek[.]'' \150\ 
Exclusion of premium payments under sections 7(e)(5) and (6) turns on 
deviation from the employee's normal work schedule. The removal of the 
word ``contract'' from the regulations does not change the fact that, 
while there need not be a formal contract or agreement under sections 
7(e)(5) or (6), there must be a discernable schedule of hours and days 
worked from which the excess or nonregular hours for which the overtime 
premiums are paid are distinguishable.\151\ Relatedly, the Department 
proposes to amend Sec.  778.207 to refer to the ``premium payments'' 
instead of ``contract premium rates.'' This change is consistent with 
the description of the overtime premiums found in Sec.  778.201 and 
removes any implication that all of the overtime premium payments must 
be paid pursuant to a formal contract.
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    \150\ 29 U.S.C. 207(e)(7).
    \151\ Section 7(e)(5) allows exclusion of premiums for hours 
``in excess of the employee's normal working hours or regular 
working hours'' and section 7(e)(6) permits exclusion of premiums 
for work on regular days of rest or on the sixth or seventh day of 
the workweek. Thus, exclusion under these provisions requires a 
discernable schedule.
---------------------------------------------------------------------------

    While the regulations at Sec. Sec.  778.202, 778.205, and 778.207 
have, since 1950, referred to employment contracts and agreements when 
describing the types of overtime premiums excludable under sections 
7(e)(5) and (6),\152\ the Department has not interpreted the use of the 
words ``contract'' or ``agreement'' to limit excludable overtime 
premium payments to only those paid pursuant to a formal contract or 
collective bargaining agreement.\153\ The Department has historically 
evaluated the actual practice of the parties to determine if extra 
payments are true overtime premiums that are excludable from the 
regular rate.\154\ In the initial publication of part 778 in 1948, for 
example, the Department emphasized the primacy of ``actual practice'' 
over any contractual terms when assessing whether extra payments were 
true overtime premiums that could be excluded from the regular 
rate.\155\
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    \152\ See 15 FR 623 (the precursor to Sec. Sec.  778.202, .205, 
and .207 was located in Sec.  778.5 in the 1950 version of the 
regulations).
    \153\ The FOH sections discussing sections 7(e)(5) and (6) 
overtime premiums make no reference to the need for a contract, and 
instead instructs investigators to look to the employee's normal 
hours or days of work ``as established by agreement or practice.'' 
FOH 32e01; see also id. 32e04 (describing criteria for 207(e)(6) 
overtime premium for work on special days without any reference to a 
requirement that the compensation be paid pursuant to contract).
    \154\ See 13 FR 4534 (Aug. 5, 1948) (codified at 29 CFR 778.2 
(1948)).
    \155\ Id. Those regulations stated that ``[t]he mere fact that a 
contract calls for premium payments for work on Saturdays, Sundays, 
holidays or at night would not necessarily prove that the higher 
rate is [a non-excludable shift differential] paid merely because of 
undesirable working hours if, as a matter of fact, the actual 
practice of the parties shows that the payments are made because the 
employees have previously worked a specified number of hours or 
days, according to a bona fide standard.'' 29 CFR 778.2 (1948).
---------------------------------------------------------------------------

    Consistent with the Department's practice, most courts have not 
required employers using the exclusions in sections 7(e)(5) and (6) to 
establish the existence of any formal contract or agreement with 
employees.\156\ Even apart from sections 7(e)(5) and (6), courts 
interpreting the FLSA do not generally require that contracts be in 
writing (unless specifically required by statute), and they likewise 
emphasize the importance of the employer's actual

[[Page 11901]]

practices in determining whether a pay practice complies with the 
FLSA.\157\
---------------------------------------------------------------------------

    \156\ See Fulmer v. City of St. Albans, W. Va., 125 Fed. App'x 
459, 460 (4th Cir. Jan. 7, 2005) (holding that city properly 
excluded overtime premiums from regular rate under 207(e)(5) even 
though the premiums were not included in employment contract and 
were mentioned only during the employment interview); Hesseltine v. 
Goodyear Tire & Rubber Co., 391 F. Supp. 2d 509, 522 (E.D. Tex. 
2005) (``If an employer voluntarily pays an employee a premium rate 
contingent upon his working more than eight hours in one day, then 
such payment may be excluded from the employee's regular rate and 
credited toward unpaid overtime.''); Laboy v. Alex Displays, Inc., 
No. 02 C 8721, 2003 WL 21209854, at *4 (N.D. Ill. May 21, 2003) 
(``The court need not determine whether the parties had an agreement 
for purposes of [section] 7(e)(7) because the payments must be 
excluded from the regular rate under [section] 7(e)(5).'').
    \157\ See Bay Ridge, 334 U.S. at 464 (``As the regular rate 
cannot be left to a declaration by the parties as to what is to be 
treated as the regular rate for an employee, it must be drawn from 
what happens under the employment contract.''); Singer v. City of 
Waco, Tex., 324 F.3d 813, 824 (5th Cir. 2003) (same); see also 149 
Madison Ave. Corp. v. Asselta, 331 U.S. 199, 204 (1947) (``[I]n 
testing the validity of a wage agreement under the Act the courts 
are required to look beyond that which the parties have purported to 
do.'') (citing Walling v. Youngerman-Reynolds Hardwood Co., 325 U.S. 
419, 424-25 (1945) (``Once the parties have decided upon the amount 
of wages and the mode of payment the determination of the regular 
rate becomes a matter of mathematical computation, the result of 
which is unaffected by any designation of a contrary `regular rate' 
in the wage contracts.'').
---------------------------------------------------------------------------

    The Department proposes to clarify these regulations to eliminate 
unnecessary confusion concerning the excludability of payments under 
sections 7(e)(5) and (6).\158\ These proposed changes would be limited 
to the regulatory sections discussed in Sec. Sec.  778.202, 778.205, 
and 778.207 and are not intended to affect the Department's 
longstanding interpretation in other contexts that a required 
``contract'' may consist of an oral agreement.\159\
---------------------------------------------------------------------------

    \158\ Although most courts do not require an employment contract 
before applying the overtime premium credits found in sections 
7(e)(5) or (6), there is evidence that the regulations have created 
some confusion. See, e.g., Scott v. City of New York, 629 F. Supp. 
2d 266, 269-70 (S.D.N.Y. 2009) (``The FLSA credits only three 
categories of contractual compensation towards overtime compensation 
mandated by the Act: premium pay for working more than a 
contractually-established number of hours day or week, premium pay 
at a rate of time and one-half for working on weekends and holidays, 
and premium pay at a rate of time and one-half for working outside 
of ordinary hours, such as a night shift.'') (emphasis in original); 
Jarmon v. Vinson Guard Servs., Inc., No. 2:08-cv-2106-VEH, 2010 WL 
11507029, at *14 (N.D. Ala. July 13, 2010) (``However, because there 
is no evidence of a collective bargaining agreement or an employment 
contract in this case, [section] 207(e)(5) is not applicable.''). 
Moreover, the language of the regulations may cause confusion for 
employers who are less familiar with WHD's practices or the relevant 
case law.
    \159\ See 29 CFR 778.204 (``[A]n employment contract for 
purposes of section 7(e)(7) may be either written or oral.'').
---------------------------------------------------------------------------

E. Clarification That Examples in Part 778 Are Not Exclusive

    The Department recognizes that compensation practices can vary 
significantly and will continue to evolve. In general, the FLSA does 
not restrict the forms of ``remuneration'' that an employer may pay--
which may include an hourly rate, salary, commission, piece rate, a 
combination thereof, or any other method--as long as the regular rate 
is equal to at least the applicable minimum wage and non-exempt 
employees are paid any overtime owed at one and one-half times the 
regular rate. While the eight categories of excludable payments 
enumerated in section 7(e)(1)-(8) are exhaustive,\160\ the Department 
proposes to confirm in Sec.  778.1 that, unless otherwise indicated, 
part 778 does not contain an exhaustive list of permissible or 
impermissible compensation practices. Rather, it provides examples of 
regular rate and overtime calculations that, by their terms, may or may 
not comply with the FLSA, and the types of compensation excludable from 
regular rate calculations under section 7(e). Because it is impossible 
to address all the various compensation and benefits arrangements that 
may exist between employers and employees, both now and in the future, 
the Department proposes to specify in Sec.  778.1 that the examples set 
forth in part 778 of the types of payments that are excludable under 
section 7(e)(1)-(8) are not exhaustive; there may be other types of 
payments not discussed or used as examples in part 778 that nonetheless 
qualify as excludable payments under section 7(e)(1)-(8).
---------------------------------------------------------------------------

    \160\ See, e.g., O'Brien v. Town of Agawam, 350 F.3d 279, 294 
(1st Cir. 2003); Caraballo v. City of Chicago, 969 F. Supp. 2d 1008, 
1015 (N.D. Ill. 2013); see also 778.200(c).
---------------------------------------------------------------------------

F. Basic Rate Calculations Under Section 7(g)(3)

    Section 7(g) of the FLSA identifies three circumstances in which an 
employer may calculate overtime compensation using a basic rate rather 
than the regular rate, provided that the basic rate is established by 
an agreement or understanding between the employer and employee, 
reached before the performance of the work.\161\ The third of these, 
identified in section 7(g)(3), allows for the establishment of a basic 
rate of pay when the rate is ``authorized by regulation by the 
Administrator as being substantially equivalent to the average hourly 
earnings of the employee, exclusive of overtime premiums, in the 
particular work over a representative period of time[.]'' \162\ Part 
548 addresses the requirements for using such basic rates to compute 
overtime pay under section 7(g)(3).\163\
---------------------------------------------------------------------------

    \161\ See 29 U.S.C. 207(g).
    \162\ Id. 207(g)(3). By contrast, section 7(g)(1) allows for a 
basic rate to be established for employees employed at piece rates, 
and section 7(g)(2) allows for a basic rate to be established for 
employees performing two or more kinds of work for which different 
hourly or piece rates apply. Id. 207(g)(1)-(2). Only the basic rate 
provided by section 7(g)(1) is limited to employees paid on a piece 
rate basis. The Department proposes to clarify the cross reference 
in Sec.  548.1 to the regulations for sections 7(g)(1) and (2), 
which are at 29 CFR 778.415-.421.
    \163\ See 29 CFR 548.1; see also id. 778.400-.401.
---------------------------------------------------------------------------

    Section 548.2 provides ten requirements for using a basic rate when 
calculating overtime compensation.\164\ Section 548.3 discusses six 
different authorized basic rates that may be used if the criteria in 
Sec.  548.2 are met.\165\ Section 548.300 explains that these basic 
rates ``have been found in use in industry and the Administrator has 
determined that they are substantially equivalent to the straight-time 
average hourly earnings of the employee over a representative period of 
time.'' \166\ As relevant to this proposed rulemaking, Sec.  548.3 
authorizes a basic rate that excludes ``additional payments in cash or 
in kind which, if included in the computation of overtime under the 
Act, would not increase the total compensation of the employee by more 
than 50 cents a week on the average for all overtime weeks . . . in the 
period for which such additional payments are made.'' \167\ Section 
548.305(b) explains that, under Sec.  548.3(e), upon agreement or 
understanding between an employer and employee, the basic rate may 
exclude from the computation of overtime ``certain incidental payments 
which have a trivial effect on the overtime compensation due.'' \168\ 
This section provides a nonexhaustive list of examples of payments that 
may be excluded, so long as the payments would not increase an 
employee's total compensation in any workweek by more than $0.50, 
including ``modest housing,'' ``bonuses or prizes of various sorts,'' 
and compensation ``for soliciting or obtaining new business.'' \169\ It 
also provides examples with specific amounts of additional payments to 
illustrate the application of Sec.  548.3(e).\170\ The $0.50 amount is 
also referenced in Sec.  548.400(b). The Department last updated these 
regulations more than 50 years ago, in 1966.\171\
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    \164\ See id. 548.2.
    \165\ See id. 548.3.
    \166\ Id. 548.300.
    \167\ Id. 548.3(e).
    \168\ Id. 548.305(b).
    \169\ Id. 548.305(b).
    \170\ See id. 548.305(c), (d), (f).
    \171\ See 31 FR 6769.
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    The Department proposes to update the $0.50 amount in Sec. Sec.  
548.3, 548.305, and 548.400. Rather than provide a specific dollar or 
cent amount, however, the Department proposes to replace the $0.50 
language in these regulations with ``40 percent of the applicable 
hourly minimum wage under section 6(a) of the Act.'' Notably, this is 
the same methodology that the Department used in the past to update the 
threshold. In 1955, the Department set the threshold

[[Page 11902]]

for excludable amounts in Sec.  548.3(e) at $0.30--which, at the time, 
was 40 percent of the hourly minimum wage required under the FLSA 
($0.75 per hour).\172\ Similarly, in 1966, after the minimum wage 
increased to $1.25 per hour, the Department correspondingly increased 
the threshold amount in Sec.  548.3(e) to $0.50--which, again, was 40 
percent of the hourly minimum wage at the time.\173\ The current 
minimum wage is $7.25 per hour, and 40 percent of $7.25 is $2.90. To 
avoid the need for future rulemaking in response to any further minimum 
wage increases, however, the Department proposes to replace the current 
$0.50 references in Sec. Sec.  548.3(e), 548.305, and 548.400(b) with 
``40 percent of the applicable minimum hourly wage under section 6(a) 
of the Act.'' Relatedly, the Department also proposes to update the 
examples provided in Sec.  548.305(c), (d), and (f) with updated dollar 
amounts, and to fix a typographical error in Sec.  548.305(e) by 
changing the phrase ``would not exceed'' to ``would exceed.'' The 
Department invites comment as to this proposal, and specifically 
invites comment as to (1) whether the additional payments that are 
excludable if they would not increase total overtime compensation 
should be tied to a percentage of the applicable minimum wage under the 
Fair Labor Standards Act, or a percentage of the applicable minimum 
wage under state or Federal law; and (2) whether 40 percent of the 
applicable minimum wage is an appropriate threshold, or if this 
proposed percentage should be increased or decreased.
---------------------------------------------------------------------------

    \172\ See 20 FR 5679.
    \173\ See 31 FR 4149 (Mar. 9, 1966); 31 FR 6769.
---------------------------------------------------------------------------

IV. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA), 44 U.S.C. 3501 et seq., 
and its attendant regulations, 5 CFR part 1320, require the Department 
to consider the agency's need for its information collections and their 
practical utility, the impact of paperwork and other information 
collection burdens imposed on the public, and how to minimize those 
burdens. This NPRM does not require a collection of information subject 
to approval by the Office of Management and Budget (OMB) under the PRA, 
or affect any existing collections of information. The Department 
welcomes comments on this determination.

V. Executive Order 12866, Regulatory Planning and Review; and Executive 
Order 13563, Improved Regulation and Regulatory Review

A. Introduction

    Under E.O. 12866, OMB's Office of Information and Regulatory 
Affairs (OIRA) determines whether a regulatory action is significant 
and, therefore, subject to the requirements of the E.O. and OMB 
review.\174\ Section 3(f) of E.O. 12866 defines a ``significant 
regulatory action'' as an action that is likely to result in a rule 
that: (1) Has an annual effect on the economy of $100 million or more, 
or adversely affects in a material way a sector of the economy, 
productivity, competition, jobs, the environment, public health or 
safety, or state, local, or tribal governments or communities (also 
referred to as economically significant); (2) creates serious 
inconsistency or otherwise interferes with an action taken or planned 
by another agency; (3) materially alters the budgetary impacts of 
entitlement grants, user fees, or loan programs, or the rights and 
obligations of recipients thereof; or (4) raises novel legal or policy 
issues arising out of legal mandates, the President's priorities, or 
the principles set forth in the E.O. OIRA has determined that this 
proposed rule is significant under section 3(f) of E.O. 12866.
---------------------------------------------------------------------------

    \174\ See 58 FR 51735 (Sept. 30, 1993).
---------------------------------------------------------------------------

    E.O. 13563 directs agencies to propose or adopt a regulation only 
upon a reasoned determination that its benefits justify its costs; that 
it is tailored to impose the least burden on society, consistent with 
achieving the regulatory objectives; and that, in choosing among 
alternative regulatory approaches, the agency has selected the 
approaches that maximize net benefits. E.O. 13563 recognizes that some 
benefits are difficult to quantify and provides that, when appropriate 
and permitted by law, agencies may consider and discuss qualitatively 
values that are difficult or impossible to quantify, including equity, 
human dignity, fairness, and distributive impacts.

B. Economic Analysis

    This economic analysis provides a quantitative analysis of 
regulatory familiarization costs attributable to the proposed rule and 
a qualitative analysis of other potential benefits, cost savings, and 
transfers. This includes a discussion of cost savings resulting from 
reduced litigation. As described above, this rule, if finalized as 
proposed, clarifies existing regulations for employees and employers in 
the 21st-century workplace with modern forms of compensation and 
benefits. The Department believes that these updates will provide 
clarity and flexibility for employers interested in providing such 
benefits to their employees. The Department welcomes comments that 
provide data or information regarding the potential benefits, cost 
savings, and transfers of this proposed rule, which may help the 
Department quantify such effects in the Final Rule's analysis.
1. Overview of Proposed Changes
    This NPRM proposes several changes to the existing regulatory 
language in 29 CFR part 778 to update and clarify the FLSA's regular 
rate requirements, and proposes a change to 29 CFR part 548 addressing 
a ``basic rate'' that can be used to calculate overtime compensation 
under section 7(g)(3) of the FLSA when specific conditions are met. 
Specifically, the Department's NPRM includes the following proposals:
     A proposal to clarify in Sec.  778.219 that payments for 
unused paid leave, including paid sick leave, may be excluded from an 
employee's regular rate of pay;
     A proposal to clarify in Sec. Sec.  778.218(b) and 778.320 
that pay for time that would not otherwise qualify as ``hours worked,'' 
including bona fide meal periods, may be excluded from an employee's 
regular rate unless an agreement or established practice indicates that 
the parties have treated the time as hours worked;
     A proposal to clarify in Sec.  778.217 that reimbursed 
expenses need not be incurred ``solely'' for the employer's benefit for 
the reimbursements to be excludable from an employee's regular rate;
     A proposal to clarify in Sec.  778.217 that certain 
reimbursements are per se reasonable and excludable from the regular 
rate;
     A proposal to eliminate the restriction in Sec. Sec.  
778.221 and 778.222 that ``call-back'' pay and other payments similar 
to call-back pay must be ``infrequent and sporadic'' to be excludable 
from an employee's regular rate, while maintaining that such payments 
must not be so regular that they are essentially prearranged;
     A proposal to clarify in Sec.  778.224 that the cost of 
providing wellness programs, onsite specialist treatment, exercise 
opportunities, employee discounts on retail goods and services, and 
certain tuition benefits may be excluded from an employee's regular 
rate of pay;
     A proposal to clarify in Sec.  778.215 the types of 
benefit plans that are

[[Page 11903]]

excludable as ``similar benefits for employees'' under section 7(e)(4);
     A proposal to clarify in Sec. Sec.  778.202, 778.203, 
778.205, and 778.207 that employers do not need a prior contract or 
agreement with the employee(s) to exclude certain overtime premiums 
described in sections 7(e)(5) and (6) of the FLSA;
     A proposal to clarify and provide examples in Sec.  
778.211 of discretionary bonuses that are excludable from an employee's 
regular rate of pay under section 7(e)(3) of the FLSA;
     A proposal to clarify in Sec.  778.1 that the examples of 
compensation discussed in part 778 of the types of excludable payments 
under section 7(e)(1)-(8) are not exhaustive; and
     A proposal to increase, from $0.50 to a weekly amount 
equivalent to 40 percent of the hourly federal minimum wage (currently 
$2.90, or 40 percent of $7.25), the amount by which total compensation 
would not be affected by the exclusion of certain additional payments 
when using the ``basic rate'' to compute overtime provided by Sec.  
548.3(e).
    To measure potential costs, cost savings, benefits, and transfers 
relative to a baseline of current practice, the Department has 
attempted to distinguish between specific proposals that would change 
existing requirements, and those that would merely clarify existing 
requirements. Here, the Department believes that only two of the 
proposals described above would constitute changes to existing 
regulatory requirements: (1) The proposal to increase the threshold for 
exclusion of certain payments when using the ``basic rate'' to compute 
overtime under Sec.  548.3(e), from $0.50 to a weekly amount equivalent 
to 40 percent of the hourly federal minimum wage (currently $2.90, or 
40 percent of $7.25); and (2) the proposal to eliminate the restriction 
in Sec. Sec.  778.221 and 778.222 that call-back pay and similar 
payments must be ``infrequent and sporadic'' to be excludable from the 
regular rate, while maintaining that such payments must not be so 
regular that they are essentially prearranged. Both of these proposed 
changes are deregulatory in nature.
    The Department believes that all of the remaining proposals would 
be clarifications consistent in substance with the existing regulations 
and statute. Thus, none of the proposals in this NPRM would impose any 
new regulatory requirements, or require any regulated entity (i.e., any 
employer) to change its conduct to remain in compliance with the law.
2. Potential Costs
    The only potential costs attributable to this proposed rulemaking 
are regulatory familiarization costs. Familiarization costs represent 
direct costs to businesses associated with reviewing any changes to 
regulatory requirements caused by a final rule. Familiarization costs 
do not include recurring compliance costs that regulated entities would 
incur with or without a rulemaking.\175\ The Department calculated 
regulatory familiarization costs by multiplying the estimated number of 
firms likely to review the proposed rule by the estimated time to 
review the rule and the average hourly compensation of a Compensation, 
Benefits, and Job Analysis Specialist.
---------------------------------------------------------------------------

    \175\ For example, time and resources spent on an annual basis 
to train staff on FLSA compliance are not familiarization costs 
attributable to any particular rulemaking, because an employer 
incurs these kinds of recurring costs regardless of whether specific 
parts of the regulations have been recently amended. To the extent 
that this proposed rule would make certain regulatory requirements 
easier to understand, the proposed rule may achieve a reduction in 
these recurring compliance costs.
---------------------------------------------------------------------------

    To calculate the cost associated with reviewing the rule, the 
Department first estimated the number of firms likely to review the 
proposed rule, when finalized.\176\ According to the data from the U.S. 
Census Bureau's Statistics of U.S. Businesses (SUSB), there is a total 
of 5,900,731 firms in the United States.\177\ The SUSB data shows that 
3,643,737 firms have four or fewer employees.\178\ These small-sized 
firms are less likely than larger firms to offer perks or benefits 
similar to those addressed in this rulemaking (e.g., wellness programs, 
on-site medical or specialty treatment, and so forth) and are typically 
exempt from legislation mandating paid sick leave or scheduling-related 
premium pay.\179\ Thus, the Department believes that firms with fewer 
than five employees are unlikely to review this proposed rule. For the 
purposes of estimating familiarization costs across all firms, the 
Department believes that the 2,256,994 firms with five or more 
employees--approximately 38 percent of all 5.9 million firms--represent 
a reasonable proxy estimate of the total number of interested firms 
expected to dedicate time learning about the proposed rule.
---------------------------------------------------------------------------

    \176\ The Department assumes that familiarization for this 
rulemaking will generally occur at the headquarters of each 
interested firm, rather than at the establishment level. According 
to a recent survey, just eight percent of surveyed employers 
reported that their benefits are administered locally at different 
``locations.'' See Soc'y for Human Res. Mgmt., 2017 Employee 
Benefits Remaining Competitive in a Challenging Talent Marketplace, 
https://www.shrm.org/hr-today/trends-and-forecasting/research-and-surveys/Documents/2017%20Employee%20Benefits%20Report.pdf.
    \177\ U.S. Census Bureau, 2015 Statistics of U.S. Businesses 
(SUSB) Annual Data Tables by Establishment Industry, https://www.census.gov/data/tables/2015/econ/susb/2015-susb-annual.html.
    \178\ Id.
    \179\ For example, none of the predictable scheduling ordinances 
recently passed in New York City, San Francisco, and Seattle apply 
to employers with fewer than 20 employees. See, e.g., S.F., Cal., 
Police Code art. 33G, 3300G.3 (2015) (applying to retail employers 
with at least 20 employees); N.Y.C., N.Y., Admin. Code 20-1201 
(2017) (applying to retail employers with at least 20 employees and 
fast food employers with at least 30 affiliated enterprise or 
franchise establishments); Seattle, Wash., Mun. Code 14.22.050 
(2017) (applying to retail, food service, and full-service 
restaurant employers with at least 500 employees). Similar coverage 
thresholds apply to employers under state paid sick leave laws in 
Maryland (15 employees), Oregon (10 employees with smaller employers 
required to provide equivalent unpaid sick leave), and Rhode Island 
(18 employees with smaller employers required to provide equivalent 
unpaid sick leave). See Md. Code, Labor & Emp't Sec.  3-1304; Or. 
Rev. Stat. Sec.  653.606; R.I. Gen. Laws Sec.  28-57-4(c).
---------------------------------------------------------------------------

    Next, the Department estimated the time interested firms would take 
to review the rule. Because the majority of the proposals discussed in 
the NPRM are merely clarifications of existing regulatory requirements, 
the Department estimates that it would take an average of approximately 
15 minutes for each interested firm to review and understand the 
changes in the rule. Some firms might spend more than 15 minutes 
reviewing the proposed rule, while others might take less time; the 
Department believes that 15 minutes is a reasonable estimated average 
for all interested firms.
    Finally, the Department estimated the hourly compensation of the 
employees who would likely review the proposed rule. The Department 
assumes that a Compensation, Benefits, and Job Analysis Specialist 
(Standard Occupation Classification 13-1141), or an employee of similar 
status and comparable pay, would review the rule at each firm. The mean 
hourly wage of a Compensation, Benefits, and Job Analysis Specialist is 
$32.29. The Department adjusted this base wage rate to reflect fringe 
benefits such as health insurance and retirement benefits, as well as 
overhead costs such as rent, utilities, and office equipment. The 
Department used a fringe benefits rate of 46 percent of the base rate 
and an overhead rate of 54 percent of the base rate, resulting in a 
fully loaded hourly compensation rate for Compensation, Benefits, and 
Job Analysis Specialists of $64.58 (= $32.29 + ($32.29 x 46%) + ($32.29 
x 54%)).
    Therefore, regulatory familiarization costs in Year 1 for 
interested firms are estimated to be $36,439,168 (=

[[Page 11904]]

2,256,994 firms x 0.25 hours of review time x $64.58 per hour), which 
amounts to a 10-year annualized cost of $4,147,361 at a discount rate 
of 3 percent (which is $1.84 per firm) or $3,992,320 at a discount rate 
of 7 percent (which is $1.77 per firm).
    This proposed rule would not impose any new requirements on 
employers or require any affirmative measures for regulated entities to 
come into compliance; therefore, there are no other costs attributable 
to this proposed rule. The Department invites comment on this analysis, 
including any relevant data or information that may further inform this 
estimate.
3. Potential Cost Savings
    The Department believes that this proposed rule could lead to 
potential cost savings. The clarifying proposals and updated examples 
included in this NPRM may reduce the amount of time employers spend 
attempting to understand their obligations under the law. For example, 
employers interested in providing an employee discount program, a 
wellness program, or onsite exercise opportunities would know 
immediately from the language proposed for inclusion in Sec.  778.224 
that the cost of providing such programs is excluded from the regular 
rate, thereby avoiding the need for further research on the issue. In 
addition, the two proposals that constitute changes to the regulations 
would also achieve cost savings. For example, the Department expects 
that the changes to the basic rate regulations will permit employers 
that use a basic rate plan to give employees additional incidental 
payments without concern about the impact on their overtime 
obligations. Increasing the amount by which total compensation would 
not be affected by the exclusion of certain additional payments when 
using the ``basic rate'' to compute overtime would both eliminate 
avoidable litigation and expand the circumstances in which employers 
that meet the requirements to use a basic rate may exclude ``certain 
incidental payments which have a trivial effect on the overtime 
compensation due.''
    The Department expects that these cost savings will outweigh 
regulatory familiarization costs. Unlike familiarization costs, the 
potential cost savings described in this section will continue into the 
future, saving employers valuable time and resources.
    The Department is unable to provide quantitative estimates for cost 
savings and other potential effects of the proposed rule due to a lack 
of data and uncertainty regarding employer responses to the proposals. 
Employers are not generally required to report to the Department their 
use of these regulatory provisions, and to the Department's knowledge, 
there is no publically available data on items such as employers' use 
of basic rate calculations to calculate overtime due. The Department 
welcomes comments providing data or information regarding possible cost 
savings attributable to this proposed rule, which may help the 
Department further quantify these effects in a Final Rule analysis.
    The Department is unable to provide quantitative estimates for 
other potential effects of the proposed rule due to a lack of data and 
uncertainty regarding employer responses to the proposals. The 
Department welcomes comments providing data or information regarding 
possible cost savings attributable to this proposed rule, which may 
help the Department further quantify these effects in a Final Rule 
analysis.
4. Potential Benefits
    This section analyzes the potential benefits if the rule is 
finalized as proposed. The Department was unable to provide 
quantitative estimates for these potential benefits due to a lack of 
data and uncertainty regarding potential employer responses to the 
proposed rule. The Department does not know, for example, how many 
employers will begin offering wellness programs or other benefits to 
their employees as a result of this rule. The Department welcomes 
comments providing data or information regarding possible benefits 
attributable to this proposed rule, which may help the Department 
quantify these effects in a Final Rule analysis.
    Distinct from the potential cost savings described above, if 
finalized as proposed, the rule will likely yield benefits. The 
Department expects that the added clarity that this rule would provide 
will encourage some employers to start providing benefits that they may 
presently refrain from providing due to apprehension about potential 
overtime consequences. These newly provided benefits might have a 
positive impact on workplace morale, employee health, employee 
compensation, and employee retention.
    For example, the Department has proposed adding ``the cost to the 
employer of providing wellness programs, such as health risk 
assessments, biometric screenings, vaccination clinics (including 
annual flu vaccinations), nutrition classes, weight loss programs, 
smoking cessation programs, stress reduction programs, exercise 
programs, and coaching to help employees meet health goals'' to the 
list of miscellaneous payments excludable from the regular rate 
provided in Sec.  778.224(b). If employers know they can offer wellness 
programs without the threat of potentially protracted class or 
collective action litigation and without potentially having to track 
employee participation in these activities for purposes of calculating 
the regular rate, employers might feel more encouraged to offer such 
programs. An increase in the provision of wellness programs similar to 
those described in the proposed rule (e.g., smoking cessation programs, 
vaccine clinics, and so forth) may improve worker health and reduce 
healthcare costs.\180\ Such improvements benefit both the worker and 
the employer with added value to each.
---------------------------------------------------------------------------

    \180\ According to a recent survey, 88 percent of employers with 
a wellness program rated their initiatives as somewhat or very 
effective in improving employee health, while 77 percent indicated 
their wellness program was somewhat or very effective in reducing 
health care costs. See Soc. for Human Res. Mgmt., 2017 Employee 
Benefits Remaining Competitive in a Challenging Talent Marketplace, 
https://www.shrm.org/hr-today/trends-and-forecasting/research-and-surveys/Documents/2017%20Employee%20Benefits%20Report.pdf.
---------------------------------------------------------------------------

    The proposed rule would also provide employers greater flexibility 
and incentivize greater creativity in their employee-benefits 
practices. This room to innovate may help workers and increase 
retention and productivity by allowing employers the chance to provide 
unique benefits that their employees want and that improve workers' 
physical and mental health, work environment, and morale. As noted 
earlier in this NPRM, the Department cannot feasibly list every 
permissible benefit that employers may provide employers, and employers 
may create new and desirable benefits in the future. But the Department 
believes that the changes it proposes here would foster that 
innovation.
    In addition, the Department believes that clarifying the 
regulations would prevent many avoidable ``regular rate'' disputes. For 
example, the omission of unused sick leave in the current version of 
Sec.  778.219 could be responsible for disputes over whether payments 
for unused sick leave should be included in the regular rate. Although 
the Department's proposal to amend Sec.  778.219 simply reflects the 
Department's current guidance, the added clarity provided by changing 
the text of the regulations might prevent future expenses stemming from 
avoidable workplace disputes. Due to uncertainty regarding the costs 
and prevalence of FLSA-related settlement agreements, arbitration 
actions, and state court filings, the Department has only estimated 
cost savings attributable

[[Page 11905]]

to an expected reduction in federal FLSA regular rate lawsuits--which 
may represent only a fraction of all regular rate litigation.
    To estimate the number of federal lawsuits that the proposed rule 
may prevent, the Department first attempted to determine the percentage 
of FLSA lawsuits that predominantly or exclusively feature a ``regular 
rate'' dispute. Here, the Department studied two sets of data. First, 
the Department examined a randomly selected sample of federal FLSA 
court filings from 2014 taken from the U.S. Court's Public Access to 
Court Electronic Records (PACER). After reviewing each of the 521 FLSA 
cases in this sample for relevant information, the Department found 
that 6.5 percent of the cases (34 out of 521) primarily featured a 
regular rate dispute. To corroborate the PACER data, the Department 
separately reviewed a sample of 258 federal court decisions from 2017 
involving FLSA collective action certification claims,\181\ and found 
that 3.9 percent of these cases primarily centered around a regular 
rate dispute (10 out of 258). Considering these two different 
percentages, the Department takes an approximate average and 
conservatively assumes that approximately five percent of all FLSA 
cases primarily or exclusively involve a regular rate dispute.
---------------------------------------------------------------------------

    \181\ Seyfarth Shaw LLP, 14th Annual Workplace Class Action 
Litigation Report 127-270 (2018), https://www.seyfarth.com/dir_docs/publications/2018_workplace_class_action_report.pdf.
---------------------------------------------------------------------------

    According to the Transactional Records Access Clearinghouse, 25,605 
federal FLSA lawsuits were filed in Fiscal Years 2015, 2016, and 2017, 
averaging 8,535 lawsuits per year.\182\ Assuming there are 
approximately 8,535 FLSA lawsuits per year, the Department estimates 
that about 427 cases, or 5 percent of 8,535, primarily or exclusively 
involve a regular rate dispute. Given data limitations, if the 
Department assumes for purposes of this analysis that this proposed 
rule would prevent approximately 10 percent of FLSA cases primarily or 
exclusively featuring a regular rate dispute then this proposed rule 
would prevent approximately 43 FLSA regular rate lawsuits per 
year.\183\
---------------------------------------------------------------------------

    \182\ TRAC at Syracuse University uses the Freedom of 
Information Act (FOIA) to obtain data about government enforcement 
and regulatory activities. According to TRAC Reports, the following 
numbers of FLSA lawsuits were filed in Fiscal Years 2015, 2016, and 
2017: 8917, 8830, and 7858. See TRAC Reports, Fair Labor Standards 
Act Lawsuits Down from 2015 Peak (2018), http://trac.syr.edu/tracreports/civil/498/.
    \183\ The Department rounds up to 43 cases for purpose of 
estimating (10 percent of 427 cases equals 42.7 cases).
---------------------------------------------------------------------------

    To quantify the cost savings for an expected reduction in FLSA 
lawsuits, the Department must estimate the average cost of an FLSA 
lawsuit. Here, the Department examined a selection of 56 FLSA cases 
concluded between 2012 and 2015 that contained litigation cost 
information.\184\ To calculate average litigation costs associated with 
these cases, the Department first examined records of court filings in 
the Westlaw Case Evaluator tool and on PACER to ascertain how much 
plaintiffs in these cases received for attorney fees, administrative 
fees, and/or other costs, apart from any monetary damages attributable 
to the alleged FLSA violations. (The FLSA provides for successful 
plaintiffs to be awarded reasonable attorney's fees and costs, so this 
data is available in some FLSA cases.) After determining the 
plaintiff's total litigation costs for each case, the Department then 
doubled the figures to account for litigation costs that the defendant 
employers incurred.\185\ According to this analysis, the average 
litigation cost for FLSA cases concluded between 2012 and 2015 was 
$654,182 per case.\186\ Applying this figure to approximately 43 
federal regular rate cases that this proposed rulemaking could prevent, 
the Department estimated that avoided litigation costs resulting from 
the rule may total approximately $28.1 million per year. Once again, 
the Department believes this total may underestimate total litigation 
costs because some FLSA regular rate cases are heard in state court and 
thus were not captured by PACER; some FLSA regular rate matters are 
resolved before litigation or by alternative dispute resolution; and 
some attorneys representing FLSA regular rate plaintiffs may take a 
contingency fee atop their statutorily awarded fees and costs. The 
Department solicits comments or available data on this issue.
---------------------------------------------------------------------------

    \184\ The 56 cases used for this analysis were retrieved from 
Westlaw's Case Evaluator database using a keyword search for case 
summaries between 2012 and 2015 mentioning the terms ``FLSA'' and 
``fees.'' Although the initial search yielded 64 responsive cases, 
the Department excluded one duplicate case, one case resolving 
litigation costs through a confidential settlement agreement, and 
six cases where the defendant employer(s) ultimately prevailed. 
Because the FLSA only entitles prevailing plaintiffs to litigation 
cost awards, information about litigation costs was only available 
for the remaining 56 FLSA cases that ended in settlement agreements 
or court verdicts favoring the plaintiff employees.
    \185\ This is likely a conservative approach to estimate the 
total litigation costs for each FLSA lawsuit, as defendant employers 
tend to incur greater litigation costs than plaintiff employees 
because of, among other things, typically higher discovery costs.
    \186\ The median cost was $111,835 per lawsuit.
---------------------------------------------------------------------------

5. Potential Transfers
    Transfer payments occur when income is redistributed from one party 
to another. The Department has identified two possible transfer 
payments between employers and employees that could occur if the rule 
is finalized as proposed, flowing in opposite directions. On the one 
hand, income might transfer from employers to employees if some 
employers respond by newly providing certain payments or benefits they 
did not previously provide. On the other hand, income might transfer 
from employees to employers if some employers respond to the proposed 
rule by newly excluding certain payments from their employees' regular 
rates without changing any other compensation practices. As discussed 
above, the Department is unable to quantify an estimated net transfer 
amount to employers or employees due to a lack of data on the kinds of 
payments employers presently provide, and the inherent uncertainty in 
predicting how employers will respond to this rule. The Department 
invites comment on this analysis, including any relevant data or 
information that might allow for a quantitative analysis of transfer 
effects in the Final Rule.
6. Summary
    The Department above discussed qualitatively the potential cost 
savings associated with reduced litigation, and estimates those cost 
savings at $281 over 10 years, or $28.1 per year. The Department 
estimates that this proposed rule, if finalized, would result in one-
time regulatory familiarization costs of $36.4 million, which would 
result in a 10-year annualized cost of $4,147,361 at a discount rate of 
3 percent or $3,992,320 at a discount rate of 7 percent.

VI. Regulatory Flexibility Analysis

    In accordance with the Regulatory Flexibility Act,\187\ the 
Department examined the regulatory requirements of the proposed rule to 
determine whether they would have a significant economic impact on a 
substantial number of small entities. The Department believes that this 
proposed rule would achieve long-term cost savings that outweigh 
initial regulatory familiarization costs.\188\ For

[[Page 11906]]

example, the Department believes that removing ambiguous language and 
adding updated examples to the FLSA's overtime regulations should 
reduce compliance costs and litigation risks that small business 
entities would otherwise continue to bear.
---------------------------------------------------------------------------

    \187\ See 5 U.S.C. 601 et seq. (as amended).
    \188\ This proposed rule would not impose any new requirements 
on employers or require any affirmative measures for regulated 
entities to come into compliance. Therefore, there are no other 
costs attributable to this deregulatory proposed rule.
---------------------------------------------------------------------------

    As discussed above, the Department used data from the U.S. Census 
Bureau's Statistics of U.S. Businesses (SUSB) to calculate the number 
of firms likely to review the proposed rule, when finalized. The SUSB 
data show that there are 5,900,731 firms in the U.S., 3,643,737 of 
which have four or fewer employees.\189\ Also, as discussed above, the 
Department believes that firms with fewer than five employees are 
unlikely to review this proposed rule, because these small-sized firms 
are less likely than larger firms to offer perks or benefits similar to 
those addressed in this rulemaking (e.g., wellness programs, on-site 
medical or specialty treatment, and so forth) and are typically exempt 
from legislation mandating paid sick leave or scheduling-related 
premium pay.\190\ Familiarization costs would therefore be zero for 
small businesses with fewer than five employees. The Department did 
estimate familiarization costs across all 2,256,994 firms with five or 
more employees, and found that the annualized familiarization cost per 
firm is $1.84 annually at a discount rate of 3 percent and $1.77 
annually at a discount rate of 7 percent.
---------------------------------------------------------------------------

    \189\ Id.
    \190\ For example, none of the predictable scheduling ordinances 
recently passed in New York City, San Francisco, and Seattle apply 
to employers with fewer than 20 employees. See, e.g., S.F., Cal., 
Police Code art. 33G, 3300G.3 (2015) (applying to retail employers 
with at least 20 employees); N.Y.C., N.Y., Admin. Code 20-1201 
(2017) (applying to retail employers with at least 20 employees and 
fast food employers with at least 30 affiliated enterprise or 
franchise establishments); Seattle, Wash., Mun. Code 14.22.050 
(2017) (applying to retail, food service, and full-service 
restaurant employers with at least 500 employees). Similar coverage 
thresholds apply to employers under state paid sick leave laws in 
Maryland (15 employees), Oregon (10 employees with smaller employers 
required to provide equivalent unpaid sick leave), and Rhode Island 
(18 employees with smaller employers required to provide equivalent 
unpaid sick leave). See Md. Code, Labor & Emp't Sec.  3-1304; Or. 
Rev. Stat. Sec.  653.606; R.I. Gen. Laws Sec.  28-57-4(c).
---------------------------------------------------------------------------

    Estimated familiarization costs would be trivial for small business 
entities, and would be well below one percent of their gross annual 
revenues. The average annual gross revenue for the smallest businesses 
is typically $100,000 or higher. Therefore, the Department certifies 
that the rule does not have a significant economic impact on a 
substantial number of small entities.

VII. Unfunded Mandates Reform Act Analysis

    The Unfunded Mandates Reform Act of 1995 (UMRA), 2 U.S.C. 1532, 
requires that agencies prepare a written statement, which includes an 
assessment of anticipated costs and benefits, before proposing any 
federal mandate that may result in excess of $100 million (adjusted 
annually for inflation) in expenditures in any one year by state, 
local, and tribal governments in the aggregate, or by the private 
sector. While this rulemaking would affect employers in the private 
sector, it is not expected to result in expenditures greater than $100 
million in any one year. Please see Section V for an assessment of 
anticipated costs and benefits to the private sector.

VIII. Executive Order 13132, Federalism

    The Department has reviewed this proposed rule in accordance with 
Executive Order 13132 regarding federalism and determined that it does 
not have federalism implications. The proposed rule would not have 
substantial direct effects on the States, on the relationship between 
the national government and the States, or on the distribution of power 
and responsibilities among the various levels of government.

IX. Executive Order 13175, Indian Tribal Governments

    This proposed rule would not have substantial direct effects on one 
or more Indian tribes, on the relationship between the Federal 
Government and Indian tribes, or on the distribution of power and 
responsibilities between the Federal Government and Indian tribes.

List of Subjects

29 CFR Part 548

    Wages.

29 CFR Part 778

    Wages.

    Signed at Washington, DC, this 20th day of March, 2019.
Keith E. Sonderling,
Acting Administrator, Wage and Hour Division.

    For the reasons set out in the preamble, the Department of Labor 
proposes to amend title 29 of the Code of Federal Regulations parts 548 
and 778 as follows:

PART 548--AUTHORIZATION OF ESTABLISHED BASIC RATES FOR COMPUTING 
OVERTIME PAY

0
1. The authority citation for Part 548 continues to read as follows:

    Authority: Sec. 7. 52 Stat. 1063, as amended; 29 U.S.C. 207, 
unless otherwise noted.

0
2. Amend Sec.  548.1 by revising the second sentence to read as 
follows:


Sec.  548.1  Scope and effect of regulations.

* * * * *
    The regulations for computing overtime pay under sections 7(g)(1) 
and 7(g)(2) of the Act for employees paid on the basis of a piece rate, 
or at a variety of hourly rates or piece rates, or a combination 
thereof, are set forth in 29 CFR 778.415-778.421.
0
3. Revise paragraph (e) of Sec.  548.3 to read as follows:


Sec.  548.3  Authorized basic rates.

* * * * *
    (e) The rate or rates (not less than the rates required by section 
6 (a) and (b) of the Act) which may be used under the Act to compute 
overtime compensation of the employee but excluding additional payments 
in cash or in kind which, if included in the computation of overtime 
under the Act, would not increase the total compensation of the 
employee by more than 40 percent of the applicable hourly minimum wage 
under section 6(a) of the Act per week on the average for all overtime 
weeks (in excess of the number of hours applicable under section 7(a) 
of the Act) in the period for which such additional payments are made.
* * * * *
0
4. Amend Sec.  548.305 by revising paragraphs (a), (c), (d), (e), (f) 
to read:


Sec.  548.305  Excluding certain additions to wages.

    (a) Section 548.3(e) authorizes as established basic rates the rate 
or rates (not less than the minimum wages required by section 6(a) and 
(b) of the Act) which may be used under the Act to compute overtime 
compensation of employees but excluding additional cash or in kind 
payments which, if included in the computation of overtime, would not 
increase the total compensation of an employee by more than 40 percent 
of the applicable hourly minimum wage under section 6(a) of the Act per 
week on the average for all overtime weeks in the period for which such 
additional payments are made.
* * * * *
    (c) The exclusion of one or more additional payments under Sec.  
548.3(e) must not affect the overtime

[[Page 11907]]

compensation of the employee by more than 40 percent of the applicable 
hourly minimum wage under section 6(a) of the Act per week on the 
average for the overtime weeks.
    (1) Example. An employee, who normally would come within the 40-
hour provision of section 7(a) of the Act, is paid a cost-of-living 
bonus of $1300 each calendar quarter, or $100 per week. The employee 
works overtime in only 2 weeks in the 13-week period, and in each of 
these overtime weeks he works 50 hours. He is therefore entitled to $10 
as overtime compensation on the bonus for each week in which overtime 
was worked (i.e., $100 bonus divided by 50 hours equals $2 an hour; 10 
overtime hours, times one-half, times $2 an hour, equals $10 per week). 
Forty percent of the minimum wage of $7.25 is $2.90. Since the overtime 
on the bonus is more than $2.90 on the average for the 2 overtime 
weeks, this cost-of-living bonus would be included in the overtime 
computation under Sec.  548.3(e).
    (2) Reserved.
    (d) It is not always necessary to make elaborate computations to 
determine whether the effect of the exclusion of a bonus or other 
incidental payment on the employee's total compensation will exceed 40 
percent of the applicable hourly minimum wage under section 6(a) of the 
Act cents per week on the average. Frequently the addition to regular 
wages is so small or the number of overtime hours is so limited that 
under any conceivable circumstances exclusion of the additional 
payments from the rate used to compute the employee's overtime 
compensation would not affect the employee's total earnings by more 
than 40 percent of the applicable hourly minimum wage under section 
6(a) of the Act per week. The determination that this is so may be made 
by inspection of the payroll records or knowledge of the normal working 
hours.
    (1) Example. An employer has a policy of giving employees who have 
a perfect attendance record during a 4-week period a bonus of $50. The 
employee never works more than 50 hours a week. It is obvious that 
exclusion of this attendance bonus from the rate of pay used to compute 
overtime compensation could not affect the employee's total earnings by 
more than $2.90 per week (i.e., 40 percent of the minimum wage of 
$7.25).\14\
    (2) Reserved.

\14\ For a 50-hour week, an employee's bonus would have to exceed 
$29 a week to affect his overtime compensation by more than $2.90 
(i.e., 40 percent of the minimum wage of $7.25). ($30 / 50 hours 
worked x 10 overtime hours x 0.5)

    (e) There are many situations in which the employer and employee 
cannot predict with any degree of certainty the amount of bonus to be 
paid at the end of the bonus period. They may not be able to anticipate 
with any degree of certainty the number of hours an employee might work 
each week during the bonus period. In such situations, the employer and 
employee may agree prior to the performance of the work that a bonus 
will be disregarded in the computation of overtime pay if the 
employee's total earnings are not affected by more than 40 percent of 
the applicable hourly minimum wage under section 6(a) of the Act per 
week on the average for all overtime weeks during the bonus period. If 
it turns out at the end of the bonus period that the effect on the 
employee's total compensation would exceed 40 percent of the applicable 
minimum wage under section 6(a) of the Act per week on the average, 
then additional overtime compensation must be paid on the bonus. (See 
Sec.  778.209 of this chapter, for an explanation of how to compute 
overtime on the bonus).
    (f) In order to determine whether the exclusion of a bonus or other 
incidental payment would affect the total compensation of the employee 
by not more than 40 percent of the applicable hourly minimum wage under 
section 6(a) of the Act per week on the average, a comparison is made 
between his total compensation computed under the employment agreement 
and his total compensation computed in accordance with the applicable 
overtime provisions of the Act.
    (1) Example. An employee, who normally would come within the 40-
hour provision of section 7(a) of the Act, is paid at piece rates and 
at one and one-half times the applicable piece rates for work performed 
during hours in excess of 40 in the workweek. The employee is also paid 
a bonus, which when apportioned over the bonus period, amounts to $10 a 
week. He never works more than 50 hours a week. The piece rates could 
be established as basic rates under the employment agreement and no 
additional overtime compensation paid on the bonus. The employee's 
total compensation computed in accordance with the applicable overtime 
provision of the Act, section 7(g)(1) \15\ would be affected by not 
more than $1 in any week by not paying overtime compensation on the 
bonus.\16\
    (2) Reserved.

\15\ Section 7(g)(1) of the Act provides that overtime compensation 
may be paid at one and one-half times the applicable piece rate but 
extra overtime compensation must be properly computed and paid on 
additional pay required to be included in computing the regular 
rate.

\16\ Bonus of $10 divided by fifty hours equals 20 cents an hour. 
Half of this hourly rate multiplied by ten overtime hours equals $1.

0
5. Revise paragraph (b) of Sec.  548.400 to read as follows:


Sec.  548.400   Procedures.

* * * * *
    (b) Prior approval of the Administrator is also required if the 
employer desires to use a basic rate or basic rates which come within 
the scope of a combination of two or more of the paragraphs in Sec.  
548.3 unless the basic rate or rates sought to be adopted meet the 
requirements of a single paragraph in Sec.  548.3. For instance, an 
employee may receive free lunches, the cost of which, by agreement or 
understanding, is not to be included in the rate used to compute 
overtime compensation.\17\ In addition, the employee may receive an 
attendance bonus which, by agreement or understanding, is to be 
excluded from the rate used to compute overtime compensation.\18\ Since 
these exclusions involve two paragraphs of Sec.  548.3, prior approval 
of the Administrator would be necessary unless the exclusion of the 
cost of the free lunches together with the attendance bonus do not 
affect the employee's overtime compensation by more than 40 percent of 
the applicable hourly minimum wage under section 6(a) of the Act per 
week on the average, in which case the employer and the employee may 
treat the situation as one falling within a single paragraph, Sec.  
548.3(e).

\17\ See Sec.  548.304.

\18\ See Sec.  548.305.

PART 778--OVERTIME COMPENSATION

0
6. The authority citation for part 778 continues to read as follows:

    Authority: 52 Stat. 1060, as amended; 29 U.S.C. 201 et seq. 
Section 778.200 also issued under Public Law 106-202, 114 Stat. 308 
(29 U.S.C. 207(e) and (h)).

0
7. Revise Sec.  778.1 to read as follows:


Sec.  778.1  Purpose of interpretive bulletin.

    (a) This part 778 constitutes the official interpretation of the 
Department of Labor with respect to the meaning and application of the 
maximum hours and overtime pay requirements contained in section 7 of 
the Fair Labor Standards Act (the Act). It is the purpose of this 
bulletin to make available in one place the interpretations of these 
provisions which will guide the Secretary of Labor and the 
Administrator in the performance of their duties under the

[[Page 11908]]

Act unless and until they are otherwise directed by authoritative 
decisions of the courts or conclude, upon reexamination of an 
interpretation, that it is incorrect. These official interpretations 
are issued by the Administrator on the advice of the Solicitor of 
Labor, as authorized by the Secretary (Reorg. Pl. 6 of 1950, 64 Stat. 
1263; Gen. Ord. 45A, May 24, 1950, 15 FR 3290).
    (b) The Department recognizes that compensation practices can vary 
significantly and will continue to evolve in the future. The Department 
also recognizes that it is not feasible to address all of the various 
compensation and benefits arrangements that may exist between employers 
and employees, both currently and in the future. In general, the FLSA 
does not restrict the forms of ``remuneration'' that an employer may 
pay--which may include an hourly rate, salary, commission, piece rate, 
a combination thereof, or any other method--as long as the regular rate 
is equal to at least the applicable minimum wage and compensation for 
overtime hours worked is paid at the rate of at least one and one-half 
times the regular rate. While the eight categories of payments in 
section 7(e)(1)-(8) of the Act are the exhaustive list of payments 
excludable from the regular rate, Part 778 does not contain an 
exhaustive list of permissible or impermissible compensation practices 
under section 7(e) of the Act, unless otherwise indicated. Rather, it 
provides examples of regular rate and overtime calculations under the 
FLSA and the types of compensation that may be excluded from regular 
rate calculations under section 7(e) of the FLSA.
0
8. Revise paragraphs (a), (b), (c), and (e) of Sec.  778.202 to read as 
follows:


Sec.  778.202  Premium pay for hours in excess of a daily or weekly 
standard.

    (a) Hours in excess of 8 per day or statutory weekly standard. Many 
employers provide for the payment of overtime compensation for hours 
worked in excess of 8 per day or 40 per week. If the payment of such 
overtime compensation is in fact contingent upon the employee's having 
worked in excess of 8 hours in a day or in excess of the number of 
hours in the workweek specified in section 7(a) of the Act as the 
weekly maximum and such hours are reflected in an agreement or by 
established practice, the extra premium compensation paid for the 
excess hours is excludable from the regular rate under section 7(e)(5) 
of the Act and may be credited toward statutory overtime payments 
pursuant to section 7(h) of the Act. In applying these rules to 
situations where it is the custom to pay employees for hours during 
which no work is performed due to vacation, holiday, illness, failure 
of the employer to provide sufficient work, or other similar cause, as 
these terms are explained in Sec. Sec.  778.216-778.224, it is 
permissible (but not required) to count these hours as hours worked in 
determining the amount of overtime premium pay, due for hours in excess 
of 8 per day or the applicable maximum hours standard, which may be 
excluded from the regular rate and credited toward the statutory 
overtime compensation.
    (b) Hours in excess of normal or regular working hours. Similarly, 
where the employee's normal or regular daily or weekly working hours 
are greater or fewer than 8 hours and 40 hours respectively and such 
hours are reflected in an agreement or by established practice, and the 
employee receives payment of premium rates for work in excess of such 
normal or regular hours of work for the day or week (such as 7 in a day 
or 35 in a week), the extra compensation provided by such premium 
rates, paid for excessive hours, is a true overtime premium to be 
excluded from the regular rate and it may be credited toward overtime 
compensation due under the Act.
    (c) Premiums for excessive daily hours. If an employee whose 
maximum hours standard is 40 hours is hired at the rate of $12 an hour 
and receives, as overtime compensation under his contract, $12.50 per 
hour for each hour actually worked in excess of 8 per day (or in excess 
of his normal or regular daily working hours), his employer may exclude 
the premium portion of the overtime rate from the employee's regular 
rate and credit the total of the extra 50-cent payments thus made for 
daily overtime hours against the overtime compensation which is due 
under the statute for hours in excess of 40 in that workweek. If the 
same contract further provided for the payment of $13 for hours in 
excess of 12 per day, the extra $1 payments could likewise be credited 
toward overtime compensation due under the Act. To qualify as overtime 
premiums under section 7(e)(5) of the Act, the daily overtime premium 
payments must be made for hours in excess of 8 hours per day or the 
employee's normal or regular working hours. If the normal workday is 
artificially divided into a ``straight time'' period to which one rate 
is assigned, followed by a so-called ``overtime'' period for which a 
higher ``rate'' is specified, the arrangement will be regarded as a 
device to contravene the statutory purposes and the premiums will be 
considered part of the regular rate. For a fuller discussion of this 
problem, see Sec.  778.501.
* * * * *
    (e) Premium pay for sixth or seventh day worked. Under sections 
7(e)(6) and 7(h) of the Act, extra premium compensation paid for work 
on the sixth or seventh day worked in the workweek (where the workweek 
schedule is reflected in an agreement or by established practice) is 
regarded in the same light as premiums paid for work in excess of the 
applicable maximum hours standard or the employee's normal or regular 
workweek.
0
9. Revise paragraph (d) of Sec.  778.203 to read as follows:


Sec.  778.203  Premium Pay for work on Saturdays, Sundays, and other 
``special days''.

* * * * *
    (d) Payment of premiums for work performed on the ``special day'': 
To qualify as an overtime premium under section 7(e)(6) of the Act, the 
premium must be paid because work is performed on the days specified 
and not for some other reason which would not qualify the premium as an 
overtime premium under sections 7(e)(5), (6), or (7) of the Act. (For 
examples distinguishing pay for work on a holiday from idle holiday 
pay, see Sec.  778.219.) Thus a premium rate paid to an employee only 
when he received less than 24 hours' notice that he is required to 
report for work on his regular day of rest is not a premium paid for 
work on one of the specified days; it is a premium imposed as a penalty 
upon the employer for failure to give adequate notice to compensate the 
employee for the inconvenience of disarranging his private life. The 
extra compensation is not an overtime premium. It is part of his 
regular rate of pay unless such extra compensation is paid the employee 
so as to qualify for exclusion under section 7(e)(2) of the Act in 
which event it need not be included in computing his regular rate of 
pay, as explained in Sec.  778.222.
0
10. Revise Sec.  778.205 to read as follows:


Sec.  778.205  Premiums for weekend and holiday work--example.

    The application of section 7(e)(6) of the Act may be illustrated by 
the following example: Suppose, based on an established practice by an 
employer, an employee earns $18 an hour for all hours worked on a 
holiday or on Sunday in the operation of machines by operators whose 
maximum hours standard is 40 hours and who are paid a bona fide hourly 
rate of $12 for like work performed during nonovertime

[[Page 11909]]

hours on other days. Suppose further that the workweek of such an 
employee begins at 12:01 a.m. Sunday, and in a particular week he works 
a schedule of 8 hours on Sunday and on each day from Monday through 
Saturday, making a total of 56 hours worked in the workweek. Tuesday is 
a holiday. The payment of $768 to which the employee is entitled will 
satisfy the requirements of the Act since the employer may properly 
exclude from the regular rate the extra $48 paid for work on Sunday and 
the extra $48 paid for holiday work and credit himself with such amount 
against the statutory overtime premium required to be paid for the 16 
hours worked over 40.
0
11. Revise paragraph (a) of Sec.  778.207 to read as follows:


Sec.  778.207  Other types of contract premium pay distinguished.

    (a) Overtime premiums are those defined by the statute. The various 
types of premium payments which provide extra compensation qualifying 
as overtime premiums to be excluded from the regular rate (under 
sections 7(e)(5), (6), and (7) of the Act and credited toward statutory 
overtime pay requirements (under section 7(h)) have been described in 
Sec. Sec.  778.201 through 778.206. The plain wording of the statute 
makes it clear that extra compensation provided by premium rates other 
than those described in the statute cannot be treated as overtime 
premiums. When such other premiums are paid, they must be included in 
the employee's regular rate before statutory overtime compensation is 
computed; no part of such premiums may be credited toward statutory 
overtime pay.
* * * * *
0
12. Revise paragraphs (c) and (d) of Sec.  778.211 to read as follows:


Sec.  778.211  Discretionary bonuses

* * * * *
    (c) Promised bonuses not excluded. The bonus, to be excluded under 
section 7(e)(3)(a) of the Act, must not be paid ``pursuant to any prior 
contract, agreement, or promise.'' For example, any bonus which is 
promised to employees upon hiring or which is the result of collective 
bargaining would not be excluded from the regular rate under this 
provision of the Act. Bonuses which are announced to employees to 
induce them to work more steadily or more rapidly or more efficiently 
or to remain with the firm are regarded as part of the regular rate of 
pay. Most attendance bonuses, individual or group production bonuses, 
bonuses for quality and accuracy of work, bonuses contingent upon the 
employee's continuing in employment until the time the payment is to be 
made and the like are in this category; in such circumstances they must 
be included in the regular rate of pay.
    (d) Labels are not determinative. The label assigned to a bonus 
does not conclusively determine whether a bonus is discretionary under 
section 7(e)(3) of the Act. Instead, the terms of the statute and the 
facts specific to the bonus at issue determine whether bonuses are 
excludable discretionary bonuses. Thus, regardless of the label or name 
assigned to bonuses, bonuses are discretionary and excludable if both 
the fact that the bonuses are to be paid and the amounts are determined 
at the sole discretion of the employer at or near the end of the 
periods to which the bonuses correspond and they are not paid pursuant 
to any prior contract, agreement, or promise causing the employee to 
expect such payments regularly. Examples of bonuses that may be 
discretionary include bonuses to employees who made unique or 
extraordinary efforts which are not awarded according to pre-
established criteria, severance bonuses, bonuses for overcoming 
challenging or stressful situations, employee-of-the-month bonuses, and 
other similar compensation. Such bonuses are usually not promised in 
advance and the fact and amount of payment is in the sole discretion of 
the employer until at or near the end of the period to which the bonus 
corresponds.
0
13. Amend Sec.  778.215 by revising paragraphs (a)(1), (a)(2), and (b) 
to read as follows:


Sec.  778.215  Conditions for exclusion of benefit-plan contributions 
under section 7(e)(4).

    (a) * * *
    (1) The contributions 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. This may be 
either a company-financed plan or an employer-employee contributory 
plan.
    (2) The primary purpose of the plan must be to provide 
systematically for the payment of benefits to employees on account of 
death, disability, advanced age, retirement, illness, medical expenses, 
hospitalization, accident, unemployment, legal services, or the like.
* * * * *
    (b) Plans under section 401(a) of the Internal Revenue Code. Where 
the benefit plan or trust has been approved by the Internal Revenue 
Service as satisfying the requirements of section 401(a) of the 
Internal Revenue Code, in the absence of evidence to the contrary, the 
plan or trust will be considered to meet the conditions specified in 
paragraphs (a)(1), (4), and (5) of this section.
0
14. Amend Sec.  778.217 by revising paragraphs (a) and (c) to read as 
follows:


Sec.  778.217  Reimbursement for expenses.

    (a) General rule. Where an employee incurs expenses on his 
employer's behalf or where he is required to expend sums by reason of 
action taken for the convenience of his employer, section 7(e)(2) is 
applicable to reimbursement for such expenses. Payments made by the 
employer to cover such expenses are not included in the employee's 
regular rate (if the amount of the reimbursement reasonably 
approximates the expense incurred). Such payment is not compensation 
for services rendered by the employees during any hours worked in the 
workweek.
* * * * *
    (c)(1) Payments excluding expenses. It should be noted that only 
the actual or reasonably approximate amount of the expense is 
excludable from the regular rate. If the amount paid as 
``reimbursement'' is disproportionately large, the excess amount will 
be included in the regular rate.
    (2) A reimbursement amount for an employee traveling on his or her 
employer's business is per se reasonable, and not disproportionately 
large, if it:
    (i) Is the same or less than the maximum reimbursement payment or 
per diem permitted for the same type of expense under the Federal 
Travel Regulation System, 41 CFR Subtitle F, or any successor 
provision; and
    (ii) Otherwise meets the requirements of this section.
    (3) Paragraph (c)(2) of this section creates no inference that a 
reimbursement for an employee traveling on his or her employer's 
business exceeding the amount permitted under the Federal Travel 
Regulation System is unreasonable.
* * * * *
0
15. Revise paragraph (b) of Sec.  778.218 to read as follows:


Sec.  778.218   Pay for certain idle hours.

* * * * *
    (b) Limitations on exclusion. This provision of section 7(e)(2) of 
the Act deals with the type of absences which are infrequent or 
sporadic or unpredictable. It has no relation to regular ``absences'' 
such as regularly scheduled days of rest. Sundays may not be workdays 
in a particular establishment, but this does not make

[[Page 11910]]

them either ``holidays'' or ``vacations,'' or days on which the 
employee is absent because of the failure of the employer to provide 
sufficient work. The term holiday is read in its ordinary usage to 
refer to those days customarily observed in the community in 
celebration of some historical or religious occasion; it does not refer 
to days of rest given to employees in lieu of or as an addition to 
compensation for working on other days.
* * * * *
0
16. Revise Sec.  778.219 to read as follows:


Sec.  778.219  Pay for forgoing holidays and unused leave.

    (a) As explained in Sec.  778.218, certain payments made to an 
employee for periods during which he performs no work because of a 
holiday, vacation, or illness are not required to be included in the 
regular rate because they are not regarded as compensation for working. 
When an employee who is entitled to such paid leave forgoes the use of 
leave and instead receives a payment that is the approximate equivalent 
to the employees' normal earnings for a similar period of working time, 
and is in addition to the employee's normal compensation for hours 
worked, the sum allocable to the forgone leave may be excluded from the 
regular rate. Such payments may be excluded whether paid out during the 
pay period in which the holiday or prescheduled leave is forgone or as 
a lump sum at a later point in time. Since it is not compensation for 
work, pay for unused leave may not be credited toward overtime 
compensation due under the Act. Three examples in which the maximum 
hours standard is 40 hours may serve to illustrate this principle:
    (1) An employee whose rate of pay is $12 an hour and who usually 
works a 6-day, 48-hour week is entitled, under his employment contract, 
to a week's paid vacation in the amount of his usual straight-time 
earnings--$576. He forgoes his vacation and works 50 hours in the week 
in question. He is owed $600 as his total straight-time earnings for 
the week, and $576 in addition as his vacation pay. Under the statute 
he is owed an additional $60 as overtime premium (additional half-time) 
for the 10 hours in excess of 40. His regular rate of $12 per hour has 
not been increased by virtue of the payment of $576 vacation pay, but 
no part of the $576 may be offset against the statutory overtime 
compensation which is due. (Nothing in this example is intended to 
imply that the employee has a statutory right to $576 or any other sum 
as vacation pay. This is a matter of private contract between the 
parties who may agree that vacation pay will be measured by straight-
time earnings for any agreed number of hours or days, or by total 
normal or expected take-home pay for the period, or that no vacation 
pay at all will be paid. The example merely illustrates the proper 
method of computing overtime for an employee whose employment contract 
provides $576 vacation pay.)
    (2) An employee who is entitled under his employment contract to 8 
hours' pay at his rate of $12 an hour for the Christmas holiday, 
forgoes his holiday and works 9 hours on that day. During the entire 
week, he works a total of 50 hours. He is paid under his contract $600 
as straight-time compensation for 50 hours plus $96 as idle holiday 
pay. He is owed, under the statute, an additional $60 as overtime 
premium (additional half-time) for the 10 hours in excess of 40. His 
regular rate of $12 per hour has not been increased by virtue of the 
holiday pay but no part of the $96 holiday pay may be credited toward 
statutory overtime compensation due.
    (3) An employee whose rate of pay is $12 an hour and who usually 
works a 40-hour week is entitled to two weeks of paid time off per year 
per his or her employer's policies. The employee takes one week of paid 
time off during the year and is paid $480 pursuant to employer policy 
for the one week of unused paid time off at the end of the year. The 
leave payout may be excluded from the employee's regular rate of pay, 
but no part of the payout may be credited toward statutory overtime 
compensation due.
    (b) Premiums for holiday work distinguished. The example in 
paragraph (a)(2) of this section should be distinguished from a 
situation in which an employee is entitled to idle holiday pay under 
the employment agreement only when he is actually idle on the holiday, 
and who, if he forgoes his holiday also, under his contract, forgoes 
his idle holiday pay.
    (1) The typical situation is one in which an employee is entitled 
by contract to 8 hours' pay at his rate of $12 an hour for certain 
named holidays when no work is performed. If, however, he is required 
to work on such days, he does not receive his idle holiday pay. Instead 
he receives a premium rate of $18 (time and one-half) for each hour 
worked on the holiday. If he worked 9 hours on the holiday and a total 
of 50 hours for the week, he would be owed, under his contract, $162 (9 
x $18) for the holiday work and $492 for the other 41 hours worked in 
the week, a total of $654. Under the statute (which does not require 
premium pay for a holiday) he is owed $660 for a workweek of 50 hours 
at a rate of $12 an hour. Since the holiday premium is one and one-half 
times the established rate for nonholiday work, it does not increase 
the regular rate because it qualifies as an overtime premium under 
section 7(e)(6), and the employer may credit it toward statutory 
overtime compensation due and need pay the employee only the additional 
sum of $6 to meet the statutory requirements. (For a discussion of 
holiday premiums see Sec.  778.203.)
    (2) If all other conditions remained the same but the contract 
called for the payment of $24 (double time) for each hour worked on the 
holiday, the employee would receive, under his contract $216 (9 x $24) 
for the holiday work in addition to $492 for the other 41 hours worked, 
a total of $708. Since this holiday premium is also an overtime premium 
under section 7(e)(6), it is excludable from the regular rate and the 
employer may credit it toward statutory overtime compensation due. 
Because the total thus paid exceeds the statutory requirements, no 
additional compensation is due under the Act. In distinguishing this 
situation from that in the example in paragraph (a)(2) of this section, 
it should be noted that the contract provisions in the two situations 
are different and result in the payment of different amounts. In the 
example in paragraph (a)(2) of this section, the employee received a 
total of $204 attributable to the holiday: 8 hours' idle holiday pay at 
$12 an hour (8 x $12), due him whether he worked or not, and $108 pay 
at the non-holiday rate for 9 hours' work on the holiday. In the 
situation discussed in this paragraph, the employee received $216 pay 
for working on the holiday--double time for 9 hours of work. All of the 
pay in this situation is paid for and directly related to the number of 
hours worked on the holiday.
0
17. Revise Sec.  778.221 to read as follows:


Sec.  778.221  ``Call-back'' pay.

    (a) General. Typically, ``call-back'' or ``call-out'' payments are 
made pursuant to agreement or established practice and consist of a 
specified number of hours' pay at the applicable straight time or 
overtime rates received by an employee on occasions when, after his 
scheduled hours of work have ended and without prearrangement, he 
responds to a call from his employer to perform extra work. The amount 
by which the specified number of hours' pay exceeds the compensation 
for hours actually worked is considered as a payment that

[[Page 11911]]

is not made for hours worked. As such, it may be excluded from the 
computation of the employee's regular rate and cannot be credited 
toward statutory overtime compensation due the employee. Payments that 
are so regular that they are essentially prearranged, however, may not 
be excluded from the regular rate. For example, if an employer retailer 
called in an employee to help clean up the store for 3 hours after an 
unexpected roof leak, and then again 3 weeks later for 2 hours to cover 
for a coworker who left work for a family emergency, payments for those 
instances would be without prearrangement and any call-back pay that 
exceeded the amount the employee would receive for the hours worked 
would be excludable. However, when payments under Sec. Sec.  778.221 
and 778.222 are so regular that they, in effect, are prearranged, they 
are compensation for work. For example, if an employer restaurant 
called in an employee server for two hours of supposedly emergency help 
during the busiest part of Saturday evening for 6 weeks out of 2 months 
in a row, that would be essentially prearranged and all of the call-
back pay would be included in the regular rate.
    (b) Application illustrated. The application of these principles to 
call-back payments may be illustrated as follows: An employment 
agreement provides a minimum of 3 hours' pay at time and one-half for 
any employee called back to work outside his scheduled hours. The 
employees covered by the agreement, who are entitled to overtime pay 
after 40 hours a week, normally work 8 hours each day, Monday through 
Friday, inclusive, in a workweek beginning on Monday, and are paid 
overtime compensation at time and one-half for all hours worked in 
excess of 8 in any day or 40 in any workweek. Assume that an employee 
covered by this agreement and paid at the rate of $12 an hour works 1 
hour overtime or a total of 9 hours on Monday, and works 8 hours each 
on Tuesday through Friday, inclusive. After he has gone home on Friday 
evening, he is called back to perform an emergency job. His hours 
worked on the call total 2 hours and he receives 3 hours' pay at time 
and one-half, or $54, under the call-back provision, in addition to 
$480 for working his regular schedule and $18 for overtime worked on 
Monday evening. In computing overtime compensation due this employee 
under the Act, the 43 actual hours (not 44) are counted as working time 
during the week. In addition to $516 pay at the $12 rate for all these 
hours, he has received under the agreement a premium of $6 for the 1 
overtime hour on Monday and of $12 for the 2 hours of overtime work on 
the call, plus an extra sum of $18 paid by reason of the provision for 
minimum call-back pay. For purposes of the Act, the extra premiums paid 
for actual hours of overtime work on Monday and on the Friday call (a 
total of $18) may be excluded as true overtime premiums in computing 
his regular rate for the week and may be credited toward compensation 
due under the Act, but the extra $18 received under the call-back 
provision is not regarded as paid for hours worked; thus, it may be 
excluded from the regular rate, but it cannot be credited toward 
overtime compensation due under the Act. The regular rate of the 
employee, therefore, remains $12, and he has received an overtime 
premium of $6 an hour for 3 overtime hours of work. This satisfies the 
requirements of section 7 of the Act. The same would be true, of 
course, if in the foregoing example, the employee was called back 
outside his scheduled hours for the 2-hour emergency job on another 
night of the week or on Saturday or Sunday, instead of on Friday night.
0
18. Revise Sec.  778.222 to read as follows:


Sec.  778.222  Other payments similar to ``call-back'' pay.

    (a) The principles discussed in 778.221 are also applied with 
respect to certain types of extra payments which are similar to call-
back pay, such as:
    (1) Extra payments made to employees for failure to give the 
employee sufficient notice to report for work on regular days of rest 
or during hours outside of his regular work schedule; and
    (2) Extra payments made solely because the employee has been called 
back to work before the expiration of a specified number of hours 
between shifts or tours of duty, sometimes referred to as a ``rest 
period.''
    (b) The extra payment, over and above the employee's earnings for 
the hours actually worked at his applicable rate (straight time or 
overtime, as the case may be), is considered as a payment that is not 
made for hours worked. Payments that are so regular that they are 
essentially prearranged, however, may not be excluded from the regular 
rate.
0
19. Amend Sec.  778.224 by revising paragraph (b) to read as follows:


Sec.  778.224  ``Other similar payments''.

* * * * *
    (b) Examples of other excludable payments. A few examples may serve 
to illustrate some of the types of payments intended to be excluded as 
``other similar payments''.
    (1) Sums paid to an employee for the rental of his truck or car.
    (2) Loans or advances made by the employer to the employee.
    (3) The cost to the employer of conveniences furnished to the 
employee such as
    (i) Parking spaces;
    (ii) Restrooms and lockers;
    (iii) On-the-job medical care;
    (iv) Treatment provided on-site from specialists such as 
chiropractors, massage therapists, physical therapists, personal 
trainers, counselors, or Employee Assistance Programs;
    (v) Gym access, gym memberships, fitness classes, and recreational 
facilities;
    (4) The cost to the employer of providing wellness programs, such 
as health risk assessments, biometric screenings, vaccination clinics 
(including annual flu vaccinations), nutrition classes, weight loss 
programs, smoking cessation programs, stress reduction programs, 
exercise programs, and coaching to help employees meet health goals; 
and
    (5) Discounts on employer-provided retail goods and services, and 
tuition benefits, provided such discounts and benefits are not tied to 
an employee's hours worked, services rendered, or other conditions 
related to the quality or quantity of work performed (except for 
fundamental conditions such as an initial waiting period for 
eligibility or a repayment requirement for employee misconduct).
0
20. Revise Sec.  778.320 to read as follows:


Sec.  778.320  Hours that would not be hours worked if not paid for.

    In some cases an agreement or established practice provides for 
compensation for hours spent in certain types of activities which would 
not be regarded as working time under the Act if no compensation were 
provided. Preliminary and postliminary activities and time spent in 
eating meals between working hours fall in this category. Compensation 
for such hours does not convert them into hours worked unless it 
appears from all the pertinent facts that the parties have treated such 
time as hours worked. Except for certain activity governed by the 
Portal-to-Portal Act (see paragraph (b) of this section), the agreement 
or established practice of the parties will be respected, if 
reasonable.
    (a) Time treated as hours worked. Where the parties have reasonably 
agreed to include as hours worked time

[[Page 11912]]

devoted to activities of the type described above, payments for such 
hours will not have the mathematical effect of increasing or decreasing 
the regular rate of an employee if the hours are compensated at the 
same rate as other working hours. The requirements of section 7(a) of 
the Act will be considered to be met where overtime compensation at one 
and one-half times such rate is paid for the hours so compensated in 
the workweek which are in excess of the statutory maximum.
    (b) Time not treated as hours worked. Under the principles set 
forth in Sec.  778.319, where the payments are made for time spent in 
an activity which, if compensable under contract, custom, or practice, 
is required to be counted as hours worked under the Act by virtue of 
Section 4 of the Portal-to-Portal Act of 1947 (see parts 785 and 790 of 
this chapter), no agreement by the parties to exclude such compensable 
time from hours worked would be valid. On the other hand, in the case 
of time spent in an activity which would not be hours worked under the 
Act if not compensated and would not become hours worked under the 
Portal-to-Portal Act even if made compensable by contract, custom, or 
practice, such time will not be counted as hours worked unless 
agreement or established practice indicates that the parties have 
treated the time as hours worked. Such time includes bona fide meal 
periods, see Sec.  785.19. Unless it appears from all the pertinent 
facts that the parties have treated such activities as hours worked, 
payments for such time will be regarded as qualifying for exclusion 
from the regular rate under the provisions of section 7(e)(2), as 
explained in Sec. Sec.  778.216 to 778.224. The payments for such hours 
cannot, of course, qualify as overtime premiums creditable toward 
overtime compensation under section 7(h) of the Act.
[FR Doc. 2019-05687 Filed 3-28-19; 8:45 am]
 BILLING CODE 4510-27-P