The U.S. Department of Labor (DOL) recently issued an opinion letter (FLSA2024-01) addressing the exclusion of daily expense payments for tools and equipment from an employee’s regular rate of pay under the Fair Labor Standards Act (FLSA). This guidance is especially helpful for employers in those industries where employees incur significant expenses for tools and equipment.  

The FLSA requires payment “at a rate not less than one and one-half times the regular rate at which the employee is employed” to all non-exempt employees for all hours worked after 40 hours in a workweek. The regular rate must include “all remuneration for employment paid to, or on behalf of, the employee,” subject to eight statutory exclusions.  

In relevant part, the FLSA permits an employer to exclude from an employee’s regular rate of pay “reasonable payments for traveling expenses, or other expenses, incurred by an employee in the furtherance of [their] employer’s interests and properly reimbursable by the employer,” as well as “other similar payments to an employee which are not made as compensation for [their] hours of employment.” 

According to the DOL, the regular rate of pay must be based on actual work conditions and cannot be agreed upon by the parties.   

Below are five key compliance tips outlined in the DOL’s letter: 

Accurate Expense Reimbursement. Ensure that expense reimbursements are based on actual or reasonably approximate expenses incurred by employees. The DOL emphasizes that only the actual or reasonably approximate amount of the expense is excludable from the regular rate. If the amount paid as ‘reimbursement’ is disproportionately large, the excess amount must be included in the regular rate. Employers should be sure to: 

• Keep detailed records of expenses incurred by employees. 

• Ensure that reimbursement amounts closely reflect the actual costs. 

Avoid Artificially Low Hourly Rates. The FLSA prohibits schemes that artificially lower hourly rates to reduce overtime pay obligations. Specifically, tool and expense reimbursement payments cannot be used to artificially reduce employees’ regular rates of pay, in an attempt to reduce the amount an employer must pay its employees for overtime work. To comply employers should: 

• Ensure that hourly rates reflect the true value of the work performed. 

• Maintain clear and honest compensation practices. 

Proper Classification of Payments. Employers must correctly classify payments to determine whether they are excludable from the regular rate. The DOL outlines that payments for expenses incurred in the furtherance of the employer’s interests can be excluded, but they must not be compensation for hours worked. Employers should: 

• Clearly distinguish between payments for expenses and compensation for work. 

• Regularly audit payment classifications to ensure compliance. 

California employers should be aware that they often face stricter laws regarding overtime pay and reimbursements compared to the FLSA. 

Complying with FLSA regular rate of pay calculations requires careful attention to detail and adherence to DOL guidelines. By accurately reimbursing expenses, properly classifying payments, maintaining comprehensive records, and providing regular training, employers can help ensure they meet FLSA legal obligations and avoid costly penalties.