DOL Issues Opinion Letter About Excluding Expense Payments From Employees’ Pay Rate for FLSA Overtime Calculations

On Nov. 8, 2024, the U.S. Department of Labor’s (DOL) Wage and Hour Division (WHD) issued opinion letter FLSA2024-01, addressing whether daily expense payments for tools and equipment may be excluded from regular rate calculations for overtime pay under the Fair Labor Standards Act (FLSA). The WHD advises that only the actual or reasonably approximate amount of tool and equipment expenses is excludable from an employee’s regular pay rate.

Background

The FLSA requires an employer to pay nonexempt employees at a rate of at least 1.5 times their regular pay rate for all hours worked over 40 in a workweek. An employee’s regular rate of pay must include all remuneration for employment paid to or on behalf of the employee, subject to certain statutory exclusions. One exclusion allows an employer to exclude reasonable payments for travel or other expenses incurred by the employee in furtherance of their employer’s interests and properly reimbursable by the employer.

Highlights

• Only the actual or reasonably approximate amount of tool and equipment expenses is excludable from an employee’s regular pay rate when calculating the employee’s overtime pay rate under the FLSA.
• To be excludable from an employee’s regular pay rate, the employee must incur the expenses on their employer’s behalf or for the employer’s convenience.
• An expense payment is part of an employee’s regular pay rate if it is based upon and varies with the number of hours worked.

Excluding Tool and Equipment Expenses

According to the WHD, for a payment to be excludable from an employee’s regular rate of pay as a reimbursement, the employee must incur expenses on their employer’s behalf or be required to expend sums because of action taken for the convenience of their employer. For reimbursement payments to be excludable from the regular rate, employees must actually incur the expenses. If an employee does not actually incur tool and equipment expenses, reimbursement payments provided by an employer for the purported expenses are not excludable from the employee’s regular pay rate.

If an expense payment is based upon and, therefore, varies with the number of hours worked per day or week, the payment is part of an employee’s regular pay rate. If the amount an employer pays as reimbursement is disproportionately large, the excess amount must be included in the employee’s regular pay rate. The WHD stresses that tool and expense reimbursement payments cannot be used to artificially reduce employees’ regular pay rates in an attempt to decrease the amount an employer must pay its employees for overtime work.

Employer Takeaway

Opinion letters provide the DOL’s official position on how labor and employment standards apply in specific situations. Employers that rely on opinion letters may be able to establish a “good faith defense” under the law. Therefore, employers should review the scenario discussed in this opinion letter and determine whether this new guidance affects their current employment and payroll practices.

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