Apr 18, 2020
by Neil Reichenberg
March 2020 DOL Wage and Hour Opinion Division Letters
The U.S. Department of Labor on March 26, 2020, issued three letters concerning what must be included in the regular rate of pay when calculating overtime payments. Click a header to read the full text of each letter.
The department decided that payments to employees based on length of service that are made to full-time employees as a result of a resolution by a city’s Board of Commissioners must be included in the employees’ regular rate when calculating overtime.
The question arose because a city’s commissioners passed a resolution in 1981 stating that city employees “shall be entitled” to receive a longevity award if they worked for five full years. The award was $2/month for each whole year of an employee’s tenure. The award is paid every two weeks, but the city is considering making it a one-time lump sum paid in December.
DOL noted that a bonus paid at Christmas or on other special occasion is a gift that is excludable from the regular rate even though the amounts paid to different employees vary according to length of service. The gift exemption applies so long as the amounts are not measured by or directly dependent upon hours worked.
While the 1981 resolution leaves the form and timing of the longevity payments to the city’s discretion, it does not provide city officials with discretion to deny the full amount of the longevity award to eligible employees. According to DOL, If the resolution stated that eligible employees “may” be entitled to longevity pay of up to a maximum amount that depends on tenure and left the actual amount of longevity pay up to city officials to determine, any such payments would not be required but only authorized by a city ordinance. As such, the payments could be excluded from the regular rate as gifts.
This letter answers whether an employee referral bonus paid in two installments must be included in the regular rate of pay. Under the program in question, a first payment is made upon the hiring of the referred employee. The second payment is made after the referred hire celebrates their one-year anniversary with the employer. Both the person who made the referral and the referred employee must still work for the employer in order for the second payment to go through. Further, neither employees who work in HR nor anyone who would have responsibility for recruiting, hiring, selecting or making the final decision to hire the referred employee can qualify to receive a referral bonus.
DOL advised that the 2019 final rule on the regular rate reaffirmed its position that sums paid to an employee for recruiting others are not part of the recruiting employee’s remuneration that must be included in the regular rate if participation is voluntary, the efforts of the employee do not involve significant time and the recruitment activities are limited to afterhours solicitation of friends or family members. The first installment of the referral bonus issue met the requirements to be excludable when calculating an employee’s regular rate of pay.
DOL also reasoned that since the second installment of the referral bonus is contingent on the referring employee remaining an employee, that payment would essentially be a longevity bonus that rewards the referring employee for an additional year of service. If the second installment required a shorter amount of time of continued employment (e.g., a single pay period), it would not be the equivalent of a longevity bonus.
Last, the Labor Department noted that it was unclear whether the program created a contractual right to the second installment that is enforceable or whether making the second installment contingent upon continued employment only preannounces the timing and amount of the latter payment. Preannouncement does not prevent a bonus from being excludable from the regular rate of pay as a gift; if preannouncement creates a legal right, however, the bonus cannot be treated as a gift.
Regardless of its treatment for income tax purpose, an employer’s contributions to a group term life insurance policy need not be included in an employee’s regular rate when calculating overtime pay.
The Internal Revenue Code requires that an employee’s taxable gross income include their employer’s contributions to group term life insurance coverage if the total amount of such policies does not exceed $50,000. In light of that rule, DOL stated that to be excludable when calculating the regular rate of pay, the insurance policy benefits in question must be specified or determined on an actuarial basis or there must be a definite formula for determining both the employer’s contributions and the benefits to employees. Nothing limits the dollar amount of contributions.
For additional information, please contact IPMA-HR Executive Director Neil Reichenberg at firstname.lastname@example.org.