With decades of experience helping organizations navigate complex HR challenges, Ling-yi Tsai is a leading expert in HR technology and compliance. We sat down with her to dissect a recent batch of opinion letters from the U.S. Department of Labor that have sent ripples through the HR community. These letters tackle some of the most persistent and thorny issues in wage and hour law, from how performance bonuses impact overtime pay to the nuances of classifying employees for exemption. Ling-yi helps us understand the critical line between a discretionary bonus and a predetermined plan, the rules surrounding compensation for pre-shift activities, and the specific criteria that define exemptions for both learned professionals and commission-based retail workers.
An employer offers bonuses for meeting safety and performance goals using a detailed formula. How does this “predetermined plan” affect overtime calculations, and what specific steps should employers take to audit their own bonus programs to ensure compliance with the Fair Labor Standards Act?
This is a classic trap that many well-intentioned employers fall into. The moment you create a bonus program with “detailed criteria and one or more formulas,” as the DOL noted in the case of those waste management drivers, you’ve likely created a non-discretionary bonus. The key factor is that you’ve set up a system that causes an employee to expect a payment if they meet certain goals. You’ve essentially abandoned your sole discretion. Because of this, those bonus payments must be factored into the employee’s regular rate of pay, which then increases the amount you owe them for any overtime hours worked. To audit your own programs, you must look for any prior contract, agreement, or promise—even an informal one—that would lead an employee to believe a bonus is guaranteed upon meeting specific metrics. If the bonus is promised in advance and triggered by conditions you’ve set, it absolutely has to be included in the regular rate for overtime purposes.
Consider a proposal to make 15-minute pre-shift roll calls “hours worked” but excludable from overtime pay. Why is this generally not permissible, and under what specific, though limited, FLSA exemptions might an employer legally exclude such time from overtime calculations? Please share some examples.
The fundamental principle here is that if time is considered “hours worked,” it must be counted toward overtime. The proposal you described, which came from a collective bargaining situation with emergency dispatchers, tried to have it both ways—compensating the time but not for overtime purposes. The DOL was quite clear that this is not permissible. Once you concede that those 15-minute roll calls are work, they go into the weekly total. While the agency did acknowledge that a couple of exemptions under the Fair Labor Standards Act could potentially allow for such an exclusion, they were quick to point out that they lacked enough information about the specific collective bargaining agreement to say if either would apply. This really underscores how narrow and specific those exemptions are; for the vast majority of employers, any required pre-shift activity that qualifies as work is fully compensable and must be included in overtime calculations.
A salaried professional, such as a social worker, is switched to an hourly pay basis after their duties change. What key factors determine if their “learned professional” exemption is lost, and what does this reveal about an employer’s discretion to classify otherwise exempt employees as non-exempt?
This case is fascinating because it highlights what truly matters for an exemption. The social worker’s duties changed—they lost supervisory responsibilities—but that alone didn’t automatically disqualify them from the learned professional exemption. The real dealbreaker was the employer’s decision to convert their pay from a salary to an hourly basis. The salary basis test is a cornerstone of most FLSA exemptions. By moving the employee to an hourly rate, the employer effectively defeated the exemption, regardless of the professional nature of their work. What this really illuminates is an employer’s flexibility. While you can’t misclassify a non-exempt employee as exempt to avoid overtime, you absolutely have the discretion to do the opposite. An employer can always choose to classify an employee who meets the tests for exemption as non-exempt and pay them overtime. It’s a one-way street in favor of the employee.
For the retail commission exemption, how must employers navigate states with a higher minimum wage when satisfying the federal pay standard? Please also clarify the distinction between tips and commissions, explaining when tips might factor into an employee’s total compensation for this exemption.
This is an area where federal law is very specific, which can be confusing for employers in states with higher local wage standards. When you’re determining if an employee meets the pay standard for the retail commission exemption, the FLSA text explicitly points to the federal minimum wage, not the state one. So, even if your state requires a higher hourly wage, the calculation for this particular federal exemption is pegged to the federal rate. The distinction between tips and commissions is also critical. The DOL was firm that tips are not considered commissions. However, they did add a layer of nuance, stating that in certain situations, a portion of an employee’s tips could be counted toward their total compensation when you’re figuring out if more than half of their pay comes from commissions. This doesn’t turn tips into commissions, but it allows them to be part of the total compensation pie in some limited circumstances, which is a detail employers need to be very careful with.
Do you have any advice for our readers?
Absolutely. My advice is to be relentlessly proactive. These DOL opinion letters aren’t creating new laws; they are clarifying existing ones and revealing common, and costly, misunderstandings. Don’t wait for a complaint or an audit to scrutinize your pay practices. Take a hard look at your bonus structures right now. Are they truly discretionary, or have you created an expectation of payment through established formulas? Review any pre- or post-shift work and ensure it’s being compensated correctly. And most importantly, regularly audit your exemption classifications. A job title means nothing; the duties and, critically, the pay structure are what determine compliance. The details matter immensely in wage and hour law, and a small oversight can easily snowball into a major liability.