Payroll Manager's - Kluwer Law International

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Meals and Lodging Help Meet Minimum Wage Requirement—Maybe For minimum wage purposes, the Fair Labor Standards Act (FLSA) does not require your company to pay the required $7.25 per hour solely in cash. In determining whether the minimum wage requirement has been met, your company may include the reasonable cost of furnished meals, lodging, and the like. However, as a new case illustrates, you cannot lump these items in with cash wages after your company’s wage rate has been challenged by a worker or the government; you must treat them as part of a worker’s wage package right from the get-go. Under the FLSA, wages include “the reasonable cost … to the employer of furnishing such employee with board, lodging, or other facilities, if such board, lodging or other facilities are customarily furnished by such employer to his employees” [29 U.S.C. § 202(m)]. It is also essential that an employee’s acceptance of these benefits be voluntary and uncoerced [29 C.F.R. § 531.30]. Example. Bill Smith works 40 hours per week for XYZ Inc. He is paid $200 a week cash wages. In addition, Smith accepts lodging and meals from XYZ as compensation for work he does. The reasonable cost of the meals and lodging provided is $120 a week. For minimum wage purposes, Smith’s weekly earnings are $200.00 + $120.00 = $320.00. Even though Smith receives only $5 per hour in cash wages, the meals and lodging bring his wages up to $8 per hour ($300/40 hours). So XYZ meets the FLSA’s minimum wage requirements. “Reasonable cost” cannot exceed the employer’s actual cost for the meals, lodging, or other facilities. This excludes any profit to the employer or to any person affiliated with the employer. For example, profits to an employer’s close relative, business associate, or agent, or to a business closely connected with an employer, will be excluded from the computation of wages. Calculation of the reasonable cost to the employer may factor in the costs of operation and maintenance, including adequate depreciation plus a reasonable allowance for interest on the depreciated amount of capital invested by the employer. In any case, however, the maximum amount allowable as reasonable cost to the employer will be the fair rental value of the lodging and the fair price of the meals or facilities offered for sale [29 C.F.R. § 531.3]. It makes no difference whether the cost of meals and lodging is deducted from the amounts required to be paid as wages, or whether the cost of such facilities is added to the amount paid as wages [29 C.F.R. § 531.36]. For example, the minimum wage requirements can be satisfied either by paying a wage at or above $7.25 per hour and deducting the applicable cost of an apartment or by paying a cash wage below $7.25 and adding the fair rental value of the apartment to bring the wages over $7.25 per hour. “Other facilities” includes: 1. Meals furnished at company restaurants or cafeterias or by hospitals, hotels, or restaurants to their employees; 2. Meals, dormitory rooms, and tuition furnished by a college to its student employees; 3. Housing furnished for dwelling purposes; 4. General merchandise furnished at company stores and commissaries (including articles of food, clothing, and household effects); 5. Fuel, electricity, water, and gas furnished for the noncommercial personal use of the employee; and 6. Transportation furnished employees between their homes and work where the travel time does not constitute hours worked compensable under the FLSA and the transportation is not an incident of and necessary to the employment. To qualify as wages, the facilities must have been furnished for the benefit of the employee and not the employer. Housing on company premises furnished to employees has been ruled to constitute part of wages, despite arguments that such housing is provided primarily for the benefit of the employer. Documentation Is a Must The FLSA, and many state wage-hour laws as well, requires that records be kept detailing the cost or value of the lodging and meals provided. Failure to keep these records can prevent an employer from including the meals and lodging in wages. New case in point. Nedra Jones worked for an assisted living facility in Maryland. She filed a lawsuit against her employer for, among other things, its failure to pay her the required minimum wage under the FLSA and Maryland law. The employer argued that Jones was adequately paid through cash and benefits, including room and board provided to her. The employer said that, on top of her cash wages, Jones received $654 per month in room and board that should be counted to make up the total wages paid to her. 6 Payroll Manager’s Letter
A federal district court ruled against the employer. The employer acknowledged that it did not provide Jones with any documentation showing the amount of any deductions for room or board taken from her wages. Because of the lack of documentation, the court said that any room and board provided for Jones could not be counted under either Maryland or the FLSA. FLSA regulations require an employer who deducts board, lodging, and other facilities from an employee’s wages to maintain and preserve records substantiating these costs on a workweek basis [29 C.F.R. § 516.27(a) and (b)]. Jones’s employer maintained no such records. In addition, Maryland law requires that if an employer plans to include board and lodging as part of a wage plan for an employee, the employer may not do so unless it receives written authorization by the employee [Md. Code. Ann., Lab. & Empl., § 3-503]. Jones’s employer never received this authorization. According to the court, the failure to substantiate the cost of the room and board, the failure to obtain written authorization from Jones, and the failure to provide her with documentation of the amount of room and board all precluded the employer from counting room and board as wages paid to Jones [Jones v. Way of Hope, Inc, Civ. No. L-08-1517 (Md., 11-6-09)]. Payroll Puzzler Q. Is a signing bonus paid to a nonexempt new hire included in the regular rate of pay for computing overtime? A. Yes. A bonus is excluded from an employee’s regular rate of pay if it is “discretionary,” but a signing bonus does not qualify as a discretionary bonus. Under Department of Labor regulations, a bonus is discretionary only if it is determined by the employer without prior promise or agreement. The employee must have no contract right, express or implied, to any amount. If the employer promises in advance to pay a bonus, the employer has abandoned its discretion with regard to the bonus [29 C.F.R. § 778.211]. Thus, any bonus promised to an individual upon acceptance of a job offer would not be considered discretionary. Q. My company reimbursed the travel expenses of several job applicants. Are these reimbursements taxable to the applicants if we received the required documentation to substantiate their expenses? Does it make any difference whether the individuals were actually hired or not? A. The IRS addressed this question in a ruling issued way back in 1963 [Rev. Rul. 63-77, 1963- 1 C.B. 177]. The IRS said that reimbursements for transportation, meals, and lodging paid to prospective employees for traveling to a job interview site were not included in taxable wages because the individuals were not yet employees. The IRS also stated that the reimbursements need not be included in the individuals’ gross income as long as the reimbursements did not exceed the individuals’ expenses. Thus, the reimbursements were not subject to employment taxes and did not have to be reported on a Form W-2 or Form 1099. However, because of subsequent developments, a little question mark may hang over this ruling. In 1984, Congress enacted detailed rules governing fringe benefits, including “working condition” fringe benefits. Under these rules, expense reimbursements are excluded from an individual’s income if he or she would be entitled to deduct the expenses as business expenses [Reg. § 1.132-5(a)(1)]. An individual is entitled to deduct job search expenses so reimbursements for these expenses meet the general working condition fringe benefit requirement. However, here’s the catch: The working condition fringe benefit exclusion applies only to a company’s current employees and independent contractors. It does not cover prospective employees, especially if they are never actually hired. Where does this leave travel reimbursements to prospective employees? Given the fact that the IRS has not specifically addressed this issue since the fringe benefit rules were enacted and that it has never revoked the 1963 ruling, you are probably on safe ground treating the reimbursements as tax-free. Payroll Manager’s Letter 7
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