Hunton Employment & Labor Perspectives

In a case of first impression, the Third Circuit rejected the view of the United States Department of Labor, ruling that incentive payments from third parties are not necessarily included in the calculation of an employee’s overtime rate.

In Secretary United States Department of Labor v. Bristol Excavating, Inc., No. 17-3663, 2019 WL 3926937 (3d Cir. Aug. 20, 2019) (“Bristol”), the Court of Appeals overturned a District Court’s order holding that all incentive payments made by third parties must be included in an employee’s overtime rate under the Federal Labor Standards Act (“FLSA”). The unanimous Third Circuit panel held that the understanding of the employer and employee determines whether third-party payments should be included in the overtime rate.

Under Section 207 of the FLSA, employers must pay employees one-and-a-half times their “regular rate” of pay for all overtime hours. Regular rate is defined as including “all remuneration for employment paid to, or on behalf of, the employee,” but “remuneration for employment” is not defined in the FLSA, and is subject to eight enumerated exemptions listed in Section 207(e) of the FLSA.

The Department of Labor had recently taken the position that third party bonuses count as remuneration for employment regardless of the agreements and expectations of employers and employees.  The Third Circuit disagreed, holding that third party bonuses qualify as remuneration only when the employer and employee have effectively agreed it will.

In the case at issue, Bristol Excavating, Inc. employed workers to provide drilling services for Talisman Energy Inc.’s natural gas drilling sites.  After work had begun on the project, Bristol employees became aware of a Talisman program awarding safety bonuses, efficiency bonuses and speed bonuses for work completed at Talisman drilling sites. Bristol and Talisman agreed that the Bristol employees could be eligible for the bonuses, which would be funded by Talisman.  Bristol would help facilitate the bonus payments, identifying whether any Bristol employees were working at that bonus eligible site, submitting invoices for the bonuses to Talisman for payment, accepting bonus payments from Talisman, deducting taxes and other costs and fees, and distributing the bonus payments to its employees. Bristol did not include the Talisman bonuses in the regular rate of pay when calculating overtime compensation for its employees, and after an audit, DOL brought this suit.

For guidance, the Third Circuit looked to the FLSA’s enumerated exemptions, and found that Section 207(e)(3) of the FLSA supported excluding third party payments from the regular rate. Section 207(e)(3) exempts from the calculation of the regular rate “[s]ums paid in recognition of services performed during a given period if . . . both the fact that payment is to be made and the amount of the payment are determined at the sole discretion of the employer at or near the end of the period and not pursuant to any prior contract, agreement, or promise causing the employee to expect such payments regularly[.]”  The Third Circuit explained that “[i]t seems unlikely that Congress intended to exempt discretionary payments from employers, but not such payments from customers.”

Since Bristol and its employees did not have an explicit agreement that the bonuses would be considered remuneration for employment, the Third Circuit examined whether there was an implicit agreement.   According to the Third Circuit, determining implicit agreement required a fact specific analysis, focusing on several key factors:

• Advance Notice – Were the specific requirements for receiving the payment known by the employees in advance of their performing the relevant work?
• Discretion as to Amount – Is the payment for a reasonably specific amount or does the third party have significant discretion as to amount; and
• Employer Involvement – Is the employer’s facilitation of the payment significantly more than serving as a go-between?

If, based on these factors, “it can fairly be said that the employer and employees have adopted the third-party incentive bonuses as part of their employment agreement,” the Third Circuit concluded, the bonuses should be included in overtime calculations.

The Third Circuit weighed the policy implications of its decision and concluded this approach protects both workers and businesses.  Employees are protected from employers trying to funnel money that should be included in the regular pay rate through third parties to avoid overtime requirements.  Employers are protected from having their labor costs unexpectedly increase whenever a third party chooses to add to an employee’s income without the employer’s input.  On the other hand, the Department of Labor’s approach could have hurt employees as businesses could have begun prohibiting third parties from providing incentive payments to their employees.

As to Bristol, the Third Circuit found sufficient dispute of fact as to whether the Bristol employees had sufficient advance notice of the speed and efficiency bonus requirements and vacated the District Court’s grant of summary judgment for the employee. On the other hand, Bristol employees were aware of the criteria and amount of the safety bonus in advance of performing work, so the Third Circuit upheld the District Court’s ruling that the safety bonus should have been included in regular rate calculations.

Going forward, businesses should closely examine any potential third party payments to their employees and consider whether the payments should be included in their regular rate calculations based on the three parameters set forth by the Third Circuit.