Employers Considering Providing Employees with “Health Care” Bonus or Stipend Should be Mindful of Overtime Obligations
Joshua L. Cannon
With the Affordable Care Act's health insurance exchanges set to begin accepting applications for enrollment beginning October 1, 2013, employers are considering what, if any, changes they will make to their group health benefits in light of the ACA's requirements. Some employers, particularly “small” employers with fewer than 50 employees, are considering dropping their group coverage in favor of having their employees purchase their own health insurance through the Exchanges (or otherwise). In some cases, this approach will result in both the employer and its employees coming out ahead after taking into account the premium tax credits available to individuals purchasing coverage through the Exchanges.
Such employers will realize savings from no longer providing their employees with health insurance and may consider passing at least some of those savings on to their employees to help offset the cost of purchasing health insurance in the individual market. Among other considerations, employers who consider passing these savings on in the form of a monthly stipend or bonus (as opposed to simply increasing their employees' hourly wage or salary) should be mindful that such a stipend or bonus will likely have an impact on their employees' base rates for purposes of determining their respective overtime rates of pay.
With certain exceptions, the federal Fair Labor Standards Act (“FLSA”) generally requires that employees working in excess of 40 hours per week be paid at the rate of 1.5 times their “regular rate” of pay for all hours in excess of 40 during the workweek. An employee's “regular rate” broadly includes all compensation for employment received by the employee that is not specifically excluded by the FLSA. One such exception is for discretionary bonuses. For a bonus to fall within this exception to the overtime rules, payment of the bonus must be within the employer's sole discretion such that the employee does not have any reason to expect it. While whether a bonus is discretionary is ultimately determined based on the facts and circumstances of each situation, if the bonus is offered on a regular basis such that the employee has come to anticipate it, it is not likely to be considered discretionary.
Nondiscretionary bonuses must be included in employees' “regular rates” for purposes of calculating overtime compensation. While such inclusion can complicate the calculation of the overtime rate (and when such overtime is payable), the regulations under the FLSA provide methods to make this determination.
Given that most employers will want to structure these “health care” bonuses or stipends in such a way as to provide a level of predictability to their employees' planning for health care expenses, the bonuses or stipends will likely need to be factored into employees' “regular rates” for purposes of calculating overtime compensation. Employers should keep this in mind if they decide to implement such a compensation system, as the penalties for failing to properly pay overtime can be fairly significant.
The information contained herein is not intended as and should not be construed as legal advice. Please consult with legal counsel before taking any action based on this information.