Fifth Circuit Court of Appeals Rules on Regular Rate of Pay Burden

On September 2nd, 2020, the Fifth Circuit Court of Appeals ruled that employees, not employers, bear the burden of proof on whether bonuses should be included in the “regular rate of pay” for purposes of calculating overtime compensation under the Fair Labor Standards Act (FLSA).

Background on Court Case

In Edwards v. 4JLJ, L.L.C., the plaintiffs alleged that their employer failed to account for certain bonuses in calculating the regular rate of pay. Section 7(e) of the FLSA excludes eight categories of remuneration from the regular rate calculation, including bonus compensation 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.”

Court Decision

The Court of Appeals, considering the statutory language as well as the interpretive regulation at 29 C.F.R. § 778.211 – Discretionary Bonus, noted that “[f]or a bonus to be excepted from the regular rate under § 207(e), the employer must maintain discretion over whether to give the bonus and the amount given.” Sighting an issue of “first impression,” the court considered whether the plaintiffs or the employer bears the burden of proof on whether bonuses are discretionary and therefore excluded from the regular rate. The court ruled that the burden is on the plaintiffs. “Section 207(e) does not exempt employers from compliance with [the overtime pay requirement in 29 U.S.C.] § 207(a)(1); it provides instruction for compliance with § 207(a)(1), where “regular rate” is used without definition. Section 207(e) provides that definition, which is crucial for employers if they are to understand what must be included in the regular rate — in order to comply with § 207(a). It was the [e]mployees’ burden to show that they “performed work for which [they were] not properly compensated.” And to do so, they must show that [their employer] ought to have included the remuneration in question in the regular rate. Because § 207(e)(3) is merely a definitional element of the regular rate — and therefore merely a definitional element of the [e]mployees’ claim — it was their burden to show that bonuses were not discretionary according to the statute’s terms.” In their final ruling, the court was in direct opposition to the regular rate definitions in § 207(e) regarding the defense of exemption from overtime requirements, which places the burden of proof on the employer.

 Employer Takeaways

The Fifth Circuit Court of Appeals only has jurisdiction over Louisiana, Mississippi, and Texas, and the decision regarding the burden of proof, as of the publication of this blog post, is not scheduled to be reviewed by the U.S. Supreme Court. Even if an employer does not fall under the jurisdiction of the Fifth Circuit, they should assess all forms of compensation provided to non-exempt employees and determine if they should be included in the regular rate of pay. Employers also need to ensure that the determination is being done consistently. Regarding bonuses, employers should review any written communications provided to employees that describe any conditions necessary to earn them and how they will be calculated. This will help to ensure that if a bonus is intended to be at the employer’s discretion, those communications do not eliminate the discretionary nature.