DOL Rings in the New Year with Updated FLSA Regs Likely to Impact Many Fire Departments – Part II – The Regular Rate

This is the second of a three-part series related to recent updates to Department of Labor (DOL) regulations pertaining to the FLSA. Click here for Part I. The updated regulations will undoubtedly affect many workers in different ways. However, for the purpose of this series, we will look at several key components of the update and how it may impact public safety professionals.

Scope of the Regular Rate Update

On December 12, 2019 the Department of Labor (DOL) announced the “first significant update to the regulations governing regular rate requirements under the Fair Labor Standards Act (FLSA) in over 50 years.” According to the DOL, the regular rate update—which will be implemented on January 15, 2020—is designed to “allow employers to more easily offer perks and benefits to their employees”. The DOL theorizes that employers would likely offer employees additional perks and benefits if those perks and benefits did not need to be included in the employee’s regular rate.

While this may seem like welcome news for both employers and employees, it may be met with a harsh reception for those employees that already receive some of these perks and benefits in their regular and overtime rate. In fact, as a result of the DOL’s regular rate update many public safety professionals (i.e. firefighters, law enforcement officers, public safety dispatchers, etc.) may see a reduction in their regular rate of pay. Since all FLSA overtime is based off of the employee’s regular rate of pay, a reduction in the regular rate will result in reduction of the employee’s overtime rate.

Specifically, in part II of this series, we will explore the DOL’s re-interpretation of whether payments made directly to employees for unused or accumulated sick leave must be included in that employee’s regular rate.

First, let’s look at the importance of the regular rate of pay under the FLSA.

Importance of the Regular Rate

Proper calculation of the regular rate is critical. The regular rate has been referred to as the “linchpin” of the FLSA. Not only is calculating the regular rate important, it can be extremely challenging, especially for firefighters.

As a general rule, the FLSA and DOL regulations require that all remuneration paid to, or on behalf of an employee included in his or her regular rate of pay. This means virtually all of the money an employee receives from his or her employer must be included in that employee’s regular rate. Since the FLSA requires that all FLSA overtime be paid at a rate not less than time and one-half of the employee’s regular rate, failure to include all remuneration in an employee’s regular rate will result in shorting that employee’s overtime rate.

Some common fire department examples of remuneration that cannot be excluded from a firefighter’s regular rate of pay include additional money paid to a firefighter for educational degrees, medic certification, working out-of-rank or at a higher rank, and even money paid directly to a firefighter for declining city sponsored medical benefits.

The FLSA and DOL regulations also identify several key exceptions to this general rule. These exceptions allow employers to exclude certain specific payments made to or on behalf of employees from their regular rate of pay.

Some common fire department examples of remuneration that can be excluded from a firefighter’s regular rate include money paid to firefighters as a reimbursement for the cost of uniforms, paid vacation and personal leave, and money paid to a third party on behalf of a firefighter to provide pension and/or medical benefits.

Over the years a great deal of litigation has developed over what must be included versus what can be excluded from an employee’s regular rate of pay. The DOL plays an important role in this litigation. Courts frequently reference and rely on DOL regulations and opinion in reaching a decision. This is especially true in litigation involving an employee’s regular rate. While this update is intended, by the DOL, to reduce confusion and provide guidance for employers, it will also impact how courts interpret the provisions of the FLSA’s regular rate requirements moving forward. In fact, the DOL estimates that in the next ten years $280 million will be saved due to reduced litigation alone as a result of this regular rate update. 

Sick Leave Buyback(s)

The first component of this update that we will drill down-on relates to payments made to firefighters—and other public safety workers—for unused sick leave. Historically, the DOL has offered the opinion that payments made to employees in exchange for their unused sick leave must be included in the employee’s regular rate. This is an opinion that has been shared by a vast majority of federal courts as well. The DOL and the clear majority of courts consider this type of monetary payment as a reward or bonus for good workplace attendance. As one court wrote: “[w]e 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.” This court went on to find that payments made directly to firefighters for unused sick leave hours could not be excluded from the firefighter’s regular rate of pay.

The DOL has departed from this long-held position in the new update. Effective January 15, 2020 payments made to employees in exchange for accrued sick leave can be excluded from that employee’s regular rate of pay.

Here is the relevant text from the updated regulations found at 29 CFR §778.219 entitled Pay for foregoing holidays and unused leave:

• Sums payable whether employee works or not. As explained in § 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.

This represents a 180-degree change in direction from the DOL. For example, if a hypothetical fire department buys-back unused sick leave from firefighters on an annual or semi-annual basis, the DOL and the vast majority of federal case law require this payment included in the firefighter’s regular rate of pay. Effective January 15, 2020 the DOL will no longer require this money included in a firefighter’s regular rate.

However, there are a couple of caveats to examine at this point.

First, under this updated regulation, in order to exclude payments for unused sick leave from an employee’s regular rate it must be “approximate[ly] equivalent to the employees’ normal earnings for a similar period of working time.” In the event a fire department pays firefighters only a percentage of their accrued sick time this regulation would likely not apply. For example, if a fire department “buys-back” unused sick leave at a rate of $.50 for every dollar owed, this regulation would likely not be applicable, and that payment could not be excluded from the firefighter’s regular rate.

Second, the DOL still squarely recognizes non-discretionary attendance bonuses cannot be excluded from an employee’s regular rate. For example, if a fire department provides a monetary reward or bonus to firefighters that do not utilize sick time over a prescribed period of time this new updated regulation would not apply.

Finally, there could be collective bargaining requirements that require money paid to firefighters for unused sick leave included in their regular rate. The FLSA represents the minimum required under the law. Collective bargaining agreements and local laws frequently exceed the requirements of the FLSA. Therefore, the impact of these changes will not be the same for every employee or employer.

Please stay tuned for the next installment in this series on the DOL’s new guidance to reinforce the exclusion of holiday pay from firefighters’ regular rate of pay.  

If you want to read the DOL’s press release on the regular rate update, click here.