Sick Leave Buy-Backs and the Regular Rate

Today’s FLSA Question: I recently read (on FirefighterOvertime.org) that money paid to firefighters for unused vacation time typically does not need to be included in a firefighter’s regular rate. Our employment contract provides “bonuses” up to $1,000 annually if a firefighter does not use any sick time in a calendar year, and states that a certain number of unused sick hours can be sold back to the city at the firefighter’s request. Our city attorney told us this money needs to be included in the regular rate. This does not make sense to me. Why would sick hours need to be included in the regular rate, but vacation hours do not?

Unfortunately, the FLSA and the regulations are not known for “making sense.” Your attorney is most likely correct. Remember, the FLSA is premised on a general rule that the regular rate must include “all remuneration for employment paid to, or on behalf of, the employee.” The answer to your question revolves around how the Department of Labor (DOL) and courts have interpreted payments made for unused sick leave and attendance bonuses in comparison to payments made for unused vacation leave.

Generally speaking, attendance bonuses and other monetary incentives designed to reward efficiency, productivity, and attendance need to be included in the regular rate. Additionally, bonuses that are explicitly promised under a collective bargaining agreement almost always need to be included in the regular rate calculation. However, there is a fair amount of debate around this issue, and not all jurisdictions view these types of incentives in the same way.

The DOL and the vast majority of courts throughout the country view sick leave buy-backs and incentives as rewards for workplace attendance. The U.S. Court of Appeals for the Eighth Circuit explained this rationale very well: “We believe consistent workplace attendance does require performance. In the modern workplace, regular and prompt workplace attendance is a valued commodity, one for which the City appropriately rewards its employees.” The court went on to find that lump sum sick leave buy-backs need to be included in firefighters’ regular rate of pay. As a general rule these types of payments need to be included in the regular rate. . .

However, notice the line “not all jurisdictions view these types of incentives the same” in the above paragraph? Unfortunately, not all jurisdictions share the same rationale when it comes to sick leave buy-backs and the regular rate. A 1995 decision from the U.S. Court of Appeals for the Sixth Circuit found that monetary incentives paid to police officers for failing to submit medical insurance claims and not utilizing accrued sick time did not need to be included in the regular rate. Obviously, each decision is based on specific individual facts, however here the court viewed payments made to police officers for nonuse of medical benefits and sick leave as “unrelated to the police officers’ compensation for services and hours of service.”

The reasoning and rationale employed by the Sixth Circuit on sick leave buy-backs is very similar to the reasoning and rationale the DOL and courts utilize for vacation buy-backs. If you remember from our recent post on vacation time buy-backs, the DOL and courts do not view money given to an employee in lieu of using paid vacation as “compensation for working.” Therefore, that money generally does not have to be included in the regular rate. Click here for more info.

Is your head spinning yet? You are not alone. Distinctions like these undoubtedly contribute to mistakes and confusion for employers trying to correctly calculate employees’ regular rates. It is estimated that fire departments across the country have paid out more than $300 million in back FLSA wages since 1985, when the United States Supreme Court found the FLSA applicable to state and local governments. This figure does not include attorneys’ fees, costs, and other damages.

Back to your question. You are correct in your first statement. Various courts and the DOL have interpreted the FLSA to not require buy-backs for unused vacation time be included in an employee’s regular rate. However, the vast amount of courts throughout the country and the DOL have found sick leave incentives, or monetary bonuses designed to reward attendance, must be included in the regular rate.

If your organization provides incentives for wellness or attendance or allows employees to sell-back unused sick time, you should consult with a local wage and hour attorney who is familiar with the FLSA. There is a strong probability this money needs to be included in your employee’s regular rate, however that may just depend on where you live.