Agreement Between the Parties Dictates Whether a Third Party Bonus Should be Included in the Calculation of Overtime Pay

Q.  A client of my company asked whether it could offer production bonuses to our employees who deliver their work product prior to the deadline.  Does the FLSA require my company to account for these third-party bonuses when calculating the regular rate of pay for overtime purposes?

A.  The answer to your question depends on the particular circumstances, according to the Third Circuit. In a case of first impression, Secretary U.S. Department of Labor v. Bristol Excavating, the Third Circuit Court of Appeals addressed the question of whether an employer must treat bonuses provided by third parties as “remuneration for employment” when calculating employees’ overtime rate of pay.

The defendant in the case, a small excavation company, contracted with a natural gas company to provide equipment, labor, and other services at a number of drill sites in Pennsylvania. At the drill sites, the defendant’s employees frequently worked twelve-hour shifts, often for two-week periods without a day off.  The natural gas company maintained a bonus program by which its own employees received “Pacesetter” bonuses for completing their work quickly, along with other safety and efficiency-related bonuses.  Following inquiries by the defendant’s employees, the gas company offered to extend the program to the defendant’s employees and the defendant acquiesced.  The defendant agreed to handle the administrative chores necessary for its employees to receive the bonuses, specifically, by rolling the bonuses into its regular payroll process and distributing payment to its employees after making the routine payroll deductions.  However, the defendant did not include the bonus payments from the gas company when calculating the regular rate of pay for overtime purposes.

The U.S. Department of Labor (DOL) audited the defendant’s offices as part of a routine inspection to assure that it was properly calculating overtime compensation. The auditor determined that the bonuses should be added to the calculation of the employees’ regular rate of pay.  When the company refused, the DOL filed suit, alleging that the company violated the FLSA’s overtime provisions.

Under the Fair Labor Standards Act (“FLSA”), employers must pay employees one-and-a-half times their regular rate of pay for all hours worked above 40 in a work week. “Regular rate” includes “all remuneration for employment paid to, or on behalf of, the employee.”  However, “remuneration for employment” is not defined in the overtime provisions or elsewhere in the FLSA.

The DOL asserted that employers must include bonuses from third parties in the regular rate of pay when calculating overtime pay, regardless of what the employer and employee may have agreed. Agreeing with the Department of Labor, the district court concluded that the incentive bonuses should have been included in the regular rate of pay because they were remuneration for employment and did not qualify for any of the statutory exemptions.

On appeal, however, the Third Circuit decided otherwise. The court held that a third-party payment qualifies as a remuneration for employment only when the employer and employee have effectively agreed that it will.  In the absence of an explicit agreement between the parties, the courts should look for an implicit agreement based on a holistic consideration of the particular facts of each case.  Factors for the court to consider include: (i) whether the specific requirements for receiving the payment are known by the employees in advance of their performing the relevant work; (ii) whether the payment itself is for a reasonably specific amount; and (iii) whether the employer’s facilitation of the payment is significantly more than serving as a pass through vehicle.  The more involved an employer becomes in facilitating the bonus or dictating its terms, “the clearer it becomes that the employer is invested in the arrangement in a way that could be called an implicit agreement with the employees.”

With these points in mind, if your company does not wish to include third-party bonuses in the regular rate of pay calculation for overtime purposes, the employer should have the employee agree in writing that such bonuses do not qualify as remuneration for employment. In addition, employers should analyze each payment carefully to ensure that it satisfies the Third Circuit test.  In any event, the less involvement the company has in facilitating bonus payments, the better, given that “an employer’s role in initiating, designing, and managing the incentive bonus program will likely be of high importance.”  We recommend consulting with counsel about how the Third Circuit’s decision in Bristol Excavating applies to your specific situation.

Rogers Stevens

 

PAID Program Provides a Way to Resolve Overtime and Minimum Wage Violations

Q.  I suspect that our company may have inadvertently committed overtime and minimum wage violations. Is there a way I can make this right without incurring substantial legal liability?

A.  Possibly. Earlier this year, the United States Department of Labor (DOL) Wage and Hour Division announced the creation of a new nationwide pilot program called the Payroll Audit Independent Determination (PAID) program. In short, the PAID program encourages employers to conduct payroll self-audits and, if they discover overtime or minimum wage violations, self-report those violations to the DOL and work with the DOL to rectify the problem and ensure employees are paid any wages owed.

Before reaching out to DOL in an effort to resolve any pay issues under PAID, employers must certify that they have read certain compliance materials about the federal Fair Labor Standards Act (FLSA). After reviewing the compliance materials, employers can self-audit their payroll practices by themselves. While the materials on the DOL website about the PAID program do not address attorney involvement, a company may consider conducting a payroll audit under the direction of an attorney. One benefit of auditing payroll practices under the supervision of an attorney is the potential to keep confidential the legal analysis and conclusions from such an audit under the attorney-client privilege. However, if an employer chooses to resolve any wage and hour issues with the DOL through the PAID program, information collected in a payroll audit inevitably will need to be disclosed to the federal government.

The PAID program is not available to employers to resolve claims that are already being investigated or litigated. Further, if either DOL or a court has determined in the past five years that the employer has violated the FLSA by engaging in the same compensation practices at issue in the proposed PAID self-audit, an employer will be prohibited from participating in PAID.

The benefit of this program? After evaluating information provided to it, DOL can accept a company into the PAID program and then facilitate the payment of wages to employees in exchange for employees agreeing to release claims with regard to the particular FLSA violation at issue—all while the company avoids the payment of liquidated damages and attorneys’ fees. Companies typically cannot require employees to waive wage claims unless the process is supervised by a court or the DOL.

The major downside? Neither the employer nor the DOL can force an employee to sign a waiver and release of claims. Employees may opt to accept payment and sign a release of claims or they can decline to accept payment and then file a private lawsuit with the knowledge that its employer believes it may have violated the law. However, an employee may be reluctant to file a private lawsuit because of the likelihood that it would take many years and require the employee to incur the cost of both attorneys’ fees and litigation.

In addition, it is possible but not certain that the DOL may share this information with other agencies, resulting in further liability.   It also appears unclear whether the DOL will apply a two year or three year statute of limitations to employers who participate in the PAID program.

The PAID program’s impact on employee claims under state wage and hour laws is uncertain. According to the DOL website, DOL “may not supervise payments or provide releases for state law violations.”  Thus, even if an employee signs a release of claims while participating in the PAID program, the employee may not release claims under state law. As such, a state labor department or private plaintiff may still try to recover unpaid wages, liquidated damages, and attorneys’ fees if available under state or local law.

As a pilot program, much remains to be seen about how the PAID program will actually be implemented. There are perhaps just as many risks as there are benefits for an employee participating in the PAID program. If your company is interested in conducting an audit of its payroll practices, or exploring the possibility of participating in the PAID program, please contact any member of the Pepper Hamilton Labor & Employment group.

Lee Tankle

Employers Not Required to Submit Pay Data or Follow Higher Salary Basis Threshold for Exempt Employees

Q.  What is the status of the EEOC’s requirement that we submit pay data with our annual EEO-1 Form?  Also, have there been any updates on the lawsuit blocking the DOL’s rule raising the salary basis for certain non-exempt employees?

A.  As we reported previously, the EEOC, as part of its effort to detect and remedy pay discrimination, amended its EEO-1 Form to require that employers with 100 or more employees submit detailed pay data on their workforce.  On August 29, 2017, the OMB sent a memorandum to the EEOC, staying implementation of this requirement.  Thus, at least for now, employers may limit the information provided on the EEO-1 Form to data on race, ethnicity and gender by occupational category (but not data on pay or hours worked).

There is similar relief for employers on the DOL overtime issue.  As we reported in a previous blog post, the United States District Court for the Eastern District of Texas granted a preliminary injunction last November, blocking the implementation of the Department of Labor’s amendments to the overtime provisions of the Fair Labor Standards Act.  On August 31, 2017, the Court took a further step, granting summary judgment blocking the rule.  The Court concluded that the Department of Labor exceeded its authority in enacting a rule raising the minimum salary threshold for executive, administrative and professional exemptions.  This likely is the official end to President Obama’s Final Overtime Rule, although President Trump may revisit the issue of the minimum salary threshold in the future.

For more information on these issues and their impact on employers, please see our Client Alert.

Lee Tankle