When an employer permits its employees to participate in a bonus program offered by the employer’s client, based on the work performed for that client, those bonuses do not always qualify as “remuneration for employment” that must be included in the employee’s “regular rate” for purposes of calculating overtime pay due under the Fair Labor Standards Act (FLSA), the U.S. Court of Appeals for the Third Circuit has held. Secretary, U.S. Dep’t of Labor v. Bristol Excavating, Inc., 2019 U.S. App. LEXIS 24767 (3rd Cir. Aug. 20, 2019). In so concluding, the Third Circuit rejected the U.S. Department of Labor’s position that any remuneration received by an employee, whether received directly from the employer or a third party, is always “remuneration for employment.”  Instead, the Court of Appeals held, that determination depends on the agreement made between the employer and the employee.

The Third Circuit has jurisdiction over the federal district courts in Pennsylvania, New Jersey, and Delaware.

Background

Generally, the overtime provisions of the FLSA require employers to pay employees one-and-a-half times their “regular rate” of pay for all hours in excess of 40 per workweek.  29 U.S.C. § 207.  With limited exceptions, the regular rate includes “all remuneration for employment paid to, or on behalf of, the employee.” However, what constitutes “remuneration for employment” is not specifically defined in the FLSA.

Bristol Excavating, a small sole proprietorship, entered into a contract (a “master service agreement”) to provide excavating services to Talisman Energy, a large natural gas production company.  Under the terms of the contract, Bristol employees put in extensive overtime hours.  Talisman Energy offered a bonus program to all employees, including to employees of companies with which Talisman had a service contract, at its sites, so Bristol employees sought and were granted permission to participate in the bonus program.  The program included several distinct bonuses, premised on safety, efficiency, and timely completion of work.

Bristol agreed to undertake the administrative and payday aspects of the Talisman bonus program for its employees, but participation in the program was never formalized, either in the master service agreement or in any separate contract between Talisman and Bristol or between Bristol and its employees.

During a subsequent, routine Department of Labor (DOL) audit, the auditor determined that Bristol was incorrectly omitting the bonuses from its calculation of overtime pay due to its employees. Bristol disagreed and the DOL filed suit.  The district court agreed with the DOL and granted it summary judgment, awarding both actual and liquidated damages.

Third Circuit Decision

Rejecting the DOL’s contention that the FLSA’s silence on what constitutes “remuneration for employment” means that all compensation, from whatever source, must be included, the Third Circuit instead concluded that “the silence of the Act is better understood as evidence that Congress took it for granted that it was only regulating the employer-employee relationship, not re-writing that relationship to impose the effects of decisions made by third parties.”  Instead, the Court of Appeals held:

[A] rule that looks to the contracting parties’ understanding to determine whether a third-party payment (even if transferred to an employee by his employer) is remuneration for employment is the correct approach, as opposed to the Department’s all-third-party-payments-are-always-remuneration rule. Both contracting parties are safeguarded by respecting their actual understanding. Money that employers and employees have agreed – either explicitly or implicitly – is part of regular pay cannot be funneled through third parties to dodge overtime requirements, so employees are protected. At the same time, employers are protected from being on the hook every time a third party chooses to add to an employee’s income.

In reaching its conclusion, the Third Circuit held that “looking to the parties’ agreement protects the employer from having to pay for a third party’s generous actions,” and that it would be unfair to force employers to include promised bonuses from third parties as remuneration in the regular rate of pay unless and until the evidence demonstrates that those bonuses have become part of the pay calculation agreed to in some fashion by the employer and employee.  While the DOL argued that its approach was consistent with the “broad remedial purpose” of the FLSA, the Court of Appeals shot back, noting that this argument ignores another statement in the Congressional findings underlying the FLSA: that protecting the well-being of workers is to be done “without substantially curtailing employment or earning power” and that imposing unexpected costs on employer does not work to the long-term benefit of employees. “The Department completely ignores that statutory purpose reflecting a very short-sighted understanding of worker well-being,” the Court of Appeals noted.  In reaching its conclusion, the Third Circuit cited to Encino Motorcars, LLC v. Navarro, 138 S. Ct. 1134 (2018), in which the Supreme Court rejected a “narrow interpretation” of the FLSA exemptions in favor of “fair reading” standard.  Notably, the Court of Appeals extended the Supreme Court’s reasoning to the Act as a whole, noting that a “fair reading of the FLSA, neither narrow nor broad, is what is called for.”

The Court of Appeals identified several factors to be considered in determining the existence of an agreement, either explicit or implicit, between the employer and employee. In this case, the Third Circuit ultimately held that the record did not establish, based on the newly-announced rule, that two of the bonuses should have been included in the regular rate of pay, as the district court had held, and thus remanded the case to the district court for further proceedings.

The Takeaway

Based on the Third Circuit’s decision, not all payments to an employee from a third party necessarily must be included in an employee’s regular rate of pay, giving employers more freedom to allow their employees to accept such payments without risking an increase in its labor costs.  However, employers should analyze each such payment carefully to ensure that it satisfies the Third Circuit’s test, and further should consider advising employees in writing whether such payments will, or will not, constitute “remuneration for employment” when calculating any overtime pay due.