Opinion ID: 4426996
Heading Depth: 3
Heading Rank: 1

Heading: Incentive Bonuses Qualify as Remuneration

Text: for Employment Only by Agreement. When interpreting a statute, we begin, of course, with the text. Cazun v. Att’y Gen., 856 F.3d 249, 255 (3d Cir. 2017). If the statute’s text is unambiguous, our inquiry ceases. Matal v. Tam, 137 S. Ct. 1744, 1756 (2017). To the extent the text may have multiple meanings, we must endeavor to discern Congress’s intent. Susinno v. Work Out World Inc., 862 F.3d 346, 348-49 (3d Cir. 2017). Here, the pertinent provision of the FLSA says that “the ‘regular rate’ at which an employee is employed shall be deemed to include all remuneration for employment paid to, 4 Because we need to remand, given that the efficiency and Pacesetter bonuses cannot at this stage be called remuneration for employment, we need not determine whether those payments qualify under the statute as exempt from inclusion in the regular rate of pay. 8 or on behalf of, the employee,” subject to certain statutory exceptions. 29 U.S.C. § 207(e). But it does not define “remuneration for employment” or address payments from third parties to employees. The Department of Labor handles that silence by arguing that “there is a presumption that remuneration in any form is included in regular rate calculations.” (Answering Br. at 9 (citations omitted).) That argument begs the question. To say that all remuneration for employment is included in the “regular rate” does not answer whether a payment, in the first place, is remuneration for employment.5 The Department of Labor also seems to argue that we should treat the Act’s silence on the meaning of “remuneration for employment” as proof that all sources of income should be treated the same when analyzing whether a payment qualifies as such remuneration. That argument, though, ignores the understanding of the parties to the actual employment agreement. The silence of the Act is better understood as evidence that Congress took it for granted that it was only regulating the employer–employee relationship, not re-writing that relationship to impose the effects of decisions made by third parties. After all, the FLSA was drafted more than 80 years ago against a long-understood and still true principle: employment contracts are contracts and must be interpreted to reflect the agreement reached by the parties. “Remuneration for employment” should therefore be 5 The Department is correct, however, that if a payment qualifies as remuneration for employment there is a presumption that such remuneration will be included in the “regular rate.” See Madison, 233 F.3d at 187. 9 understood as being what the employer and the employee agreed would be paid for the job. There is, moreover, strong support in other provisions of the FLSA for the view that third-party payments should be viewed differently from those made by an employer. The FLSA as originally passed contained no reference to any payments from third parties to employees. Fair Labor Standards Act of 1938, ch. 676, § 1, 52 Stat. 1060-69 (1938). In 1966, though, Congress amended the Act to allow tips received by employees to be counted by employers in determining whether they have fulfilled up to 50% of their minimum wage obligation. Pub. L. No. 89-601, § 101(a), 80 Stat. 830 (1966) (adding § 203(m) to 29 U.S.C. § 203). Thus, the first time that Congress spoke about third-party payments, it allowed employers to count such payments – up to a point – for the purpose of the minimum wage requirement. If such payments had already been understood in the law to be included in employees’ wages, that amendment would have been superfluous. The 1966 amendment indicates the sensible legislative understanding that money given by a third party to an employee is not automatically remuneration for employment. As the Supreme Court observed, “[t]he Fair Labor Standards Act is not intended to do away with tipping” and “not every gratuity given a worker by his employer’s customer is a part of his wages[,]” meaning, of course, the wages used to calculate the regular rate of pay. Williams v. Jacksonville Terminal Co., 315 U.S. 386, 388, 404 (1942). In 1974, Congress clarified that tips could only be counted towards the minimum wage requirement if the “employee has been informed by the employer.” Pub. L. No. 93-259, § 13(e), 88 Stat. 65 (1974). In other words, a third-party payment – tips – would be included in the regular rate of pay 10 if there was an understanding between employer and employee about the treatment of the third-party payment. At least one of the statutory exemptions to the overtime provisions gives further support to reading the FLSA as treating third-party payments differently. That exemption excludes from the regular rate of pay any discretionary incentive bonuses paid by employers. 29 U.S.C. § 207(e)(3) (exempting “[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”). It seems unlikely that Congress intended to exempt discretionary payments from employers, but not such payments from customers. The guidance we have from the case law is also consistent with that view. The Supreme Court has described the regular rate of an employee’s pay as a matter of agreement between the employer and the employee, saying, “[t]he regular rate by its very nature must reflect all payments which the parties have agreed shall be received regularly during the workweek, exclusive of overtime payments.” Walling v. Youngerman-Reynolds Hardwood Co., 325 U.S. 419, 424 (1945) (emphasis added). That common-sense view has never before been challenged. Therefore, a rule that looks to the contracting parties’ understanding to determine whether a third-party payment (even if transferred to an employee by his employer) is remuneration for employment is the correct approach, as 11 opposed to the Department’s all-third-party-payments-arealways-remuneration rule. Both contracting parties are safeguarded by respecting their actual understanding. Money that employers and employees have agreed – either explicitly or implicitly – is part of regular pay cannot be funneled through third parties to dodge overtime requirements, so employees are protected. At the same time, employers are protected from being on the hook every time a third party chooses to add to an employee’s income. Two examples illustrate the latter point. Take the case of a youngster on his first job. Because his father wants him to excel and cares about the family’s reputation, he offers his son an extra five dollars every time the boy can show he successfully completed a certain number of assigned tasks at work. Such a third-party payment gives an incentive to the youngster to perform well for his employer, but, even if the employer knew the father was providing his son with that bonus, it would simply be wrong to say that the extra pay should be considered remuneration for the boy’s work, unless this was part of the employment agreement. Under the Department’s rule, however, the employer would be forced to include the father’s payment in the regular rate of pay, meaning that the father could cause the employer’s labor costs to increase, without the employer having any say in the matter. A rule that focuses on what the parties agreed to, on the other hand, would exclude such payments and enable the employer to determine and limit its own labor costs. And, as described above, nothing in the Act or the history of its enforcement indicates that such a bonus belongs in the regular rate of the son’s pay. 12 Next, consider a car service driver. A regular passenger tells his driver that each time the driver is on time he will give the driver an extra ten dollars. The passenger pays this by credit card, and the driver’s employer remits the regularized tip to the employee, as the law requires. That incentive bonus arrangement clearly benefits the employee, and it arguably helps the employer too, as its customer is happier if the driver is on time. But the mutuality of satisfaction with the bonus does not make it part of the employment agreement. Again, the Department’s rule would allow the customer to unilaterally alter the employer’s labor costs, whereas a rule that focuses on the parties’ agreement would prevent the employer’s costs from being decided by the whims of an outsider. In short, in both the case of the youngster and the car service driver, looking to the parties’ agreement protects the employer from having to pay for a third party’s generous actions. It does damage to the employment relationship to force employers to include promised bonuses from third parties as remuneration in the regular rate of pay, unless and until the evidence demonstrates that those bonuses have become part of the pay calculation agreed to in some fashion by the employer and employee. In like manner, respecting the contracting parties’ actual agreement protects the employee. One can imagine a circumstance in which an employer tries to pressure an employee to accept remuneration from a third party so as to artificially suppress on paper what the employer and employee both regard as the regular rate of pay. Such a manipulation would also occur if an employer tried to categorize a portion of what was base pay as instead being a 13 bonus. The parties’ true agreement is what should matter, not labels. See Youngerman–Reynolds Hardwood, 325 U.S. at 424 (“[The regular rate] is not an arbitrary label chosen by the parties; it is an actual fact.”). This is not only a matter of common law, but also of common sense.6 It is axiomatic that a mutual assent is 6 As for common sense, we cite no less an authority than Clark W. Griswold. In the classic movie National Lampoon’s Christmas Vacation, the plot revolves around Clark’s anxious anticipation of his Christmas bonus. See National Lampoon’s Christmas Vacation (Warner Bros. 1989) (Really, you should see it.). When the regular bonus does not arrive and instead Clark receives a jelly-of-themonth club membership, he berates his boss, saying, “Seventeen years with the company, I’ve gotten a Christmas bonus every year but this one. You don’t want to give bonuses, fine. But when people count on them as part of their salary, well[.]” Id. Unlike the Christmas lights on his house, Clark doesn’t seem to be overly bright, but he at least understands how a course of dealing can lead to an expectation that could be viewed as a meeting of the minds about remuneration for employment. In other words, it is common sense that labels alone do not control. And, of course, the required agreement between employer and employee need not be explicit. It may be implied through an employer’s significantly facilitating regular compensation that reaches the employee. Walling v. Richmond Screw Anchor Co., 154 F.2d 780, 784-85 (2d Cir. 1946). Whether an agreement is fairly implied is discussed further herein. See infra at II.B. 14 necessary to form a contract. See 1 Samuel Williston & Richard A. Lord, A Treatise on the Law of Contracts § 4:1 (4th ed. 1993 & Supp. 2019) (recognizing that long-standing principle and noting that “the inquiry will focus not on the question of whether the subjective minds of the parties have met, but on whether their outward expression of assent is sufficient to form a contract”). The FLSA naturally takes account of that. The Department of Labor views the situation differently. It relies on three Wage and Hour Division Opinion Letters, a district court opinion, and the purpose of the FLSA to contend that “compensation for performing work” qualifies as remuneration for employment, regardless of whether the payment is provided by a third party and no agreement exists. (Answering Br. at 15.) But none of those authorities will bear the weight of the conclusion pressed by the Department. The three Wage and Hour Division Opinion Letters the Department of Labor relies on do not actually undercut the necessity of an agreement at all. Two of the letters – one from 2005, U.S. Dep’t of Labor, Wage & Hour Div., Opinion Letter (July 5, 2005), and one from 1966, U.S. Dep’t of Labor, Wage & Hour Div., Opinion Letter (Nov. 16, 1966) (Answering Br. Add. B) – address programs in which retail employees could earn a bonus by selling a vendor’s products. In the scenarios those letters describe, a third party sponsored the bonuses in concert with the employer. The sponsorship was effectively joint.7 Thus, the bonus payments could, given 7 Those programs addressed a vendor compensating retail employees under circumstances where the only 15 the specific facts of those cases, rightly be seen as part of the relevant employment agreements. The third letter, another from the mid-60’s, covers a third-party payment from a taxi cab company to hotel doormen. U.S. Dep’t of Labor, Wage & Hour Div., Opinion Letter (May 25, 1967) (Answering Br. Add. A). In that scenario, the hotel employees received regular monthly payments from the cab company and the employer actively advocated treating those payments as remuneration for employment. See Walling v. Richmond Screw Anchor Co., 154 F.2d 780, 784 (2d Cir. 1946) (concluding that payments that were regularly and actually made and facilitated by the employer could qualify as remuneration for employment). Significantly, the employer was seeking a determination from the Department of Labor that the third-party payments could be credited towards the employer’s minimum wage obligations. In other words, the hotel embraced, rather than disputed, that the payments to the doormen were compensation for employment. Facts like that matter. The district court case the Department of Labor relies on, Romano v. Site Acquisitions, LLC, is also unpersuasive for the position the Department has taken here. No. 15-cv-384, 2017 WL 2634643 (D.N.H. June 19, 2017). First of all, the Department has enforced the FLSA for a very long time, yet it can only point to a single unreported district court opinion conclusion that can be drawn is that the programs were jointly sponsored. Because in each instance the retailer controlled both the store and its employees, it had to have approved and actively participated in the program from the outset for the sponsorship program to function. 16 indicating that an incentive bonus from a third party could be included in employees’ remuneration for employment. Id., at -9. The near total absence of other authority is alone telling. If, in eight decades, no court has said what the Department of Labor now asserts is the meaning of the statute, that interpretation is probably unsupported because it is unsupportable. Moreover, a careful reading of Romano lends little aid to the Department’s position. Romano did not reach the conclusion that incentive bonuses are always remuneration for employment. The court in that case held that an incentive bonus that AT&T gave a contractor’s employees, paid through the contractor, could be included when calculating the regular rate. 2017 WL 2634643, at -2, 4, 8-9. But the court’s analysis focused on the statutory exemptions to overtime calculations and not on whether the payments were “remuneration for employment” in the first place. Id. at -9. As the Department acknowledges, in Romano the employer did not argue that the payments were not remuneration for employment, only that they fit under an exemption. Id. In addition, the procedural posture of the case was a motion by the employer for summary judgment. Id. at . The court therefore only determined that the employer’s exemptionbased arguments in favor of summary judgment were insufficient. The opinion went no further.8 8 The Department also cites to Mata v. Caring For You Home Health, Inc., 94 F. Supp. 3d 867 (S.D. Tex. 2015), but that case is plainly inapposite. In Mata, money from a state health program was used to pay employees’ bonuses, but the employer retained discretion to decide if the money would be given as a bonus or used for health insurance. Id. at 876. The 17 The Department of Labor also argues that its preferred definition of remuneration for employment “is reasonable in light of the purpose of the FLSA” and is supported by our Court’s long recognition of “the FLSA’s broad remedial purpose.” (Answering Br. at 29 (citations omitted).) The statutory purpose that the Department focuses on is the protection of the “general well-being of workers.” 29 U.S.C. § 202(a). But the FLSA also recognizes that protecting the “general well-being of workers” is to be done “without substantially curtailing employment or earning power.” 29 U.S.C. § 202. The Department completely ignores that statutory purpose, reflecting a very short-sighted understanding of worker well-being. Imposing unexpected costs on employers does not work to the long-term benefit of employees. On the contrary, an employer’s costs can certainly have negative consequences for employees. The Department’s preferred rule would encourage employers to stop allowing their employees to accept bonuses from third parties, lest the employer’s own labor costs increase. If that predictable consequence ensues, employees will be denied extra income. And, if some companies decide to swallow the risk and allow such bonuses, they will nevertheless have to deal with the court’s analysis only addressed whether the payments qualified under an exemption to § 207(e), since employees had been told “that they would receive the bonus as part of their wages” and there was little doubt the bonuses were agreed to serve as compensation for employment. Id. at 87576. 18 increased labor costs in some way. They will either increase their prices as they bid on jobs, or, to remain competitive, they will cut costs somewhere, perhaps by hiring fewer workers. The challenge will be particularly felt by small businesses that can ill-afford to deal with the added expense and complexity imposed by the Department’s rule. In the end, allowing third parties to unilaterally increase a company’s labor costs is likely to be bad for employees as well as employers. For instance, here, had Bristol known that permitting the employees to qualify for the bonuses would increase its labor costs, perhaps it would have said no when the employees asked if they could accept them. The Department thus is arguably not following the FLSA’s instruction to protect the “general well-being of workers[.]” Id. But even if the pain of the Department’s interpretation were only visited on employers, it is a “flawed premise” to think “that the FLSA pursues its remedial purpose at all costs.” Encino Motorcars, LLC v. Navarro, 138 S. Ct. 1134, 1142 (2018) (internal quotation marks and citations omitted). Indeed, “no legislation pursues its purposes at all costs.” Rodriguez v. United States, 480 U.S. 522, 525-26 (1987) (per curiam). “[A] fair reading” of the FLSA, neither narrow nor broad, is what is called for. Encino Motorcars, 138 S. Ct. at 1142. And that is as should be expected, because employees’ rights are not the only ones at issue and, in fact, are not always separate from and at odds with their employers’ interests. In short, we reject the Department’s proposition that all third-party payments are to be considered remuneration for employment. Instead, we conclude that a third-party payment 19 qualifies as remuneration for employment only when the employer and employee have effectively agreed it will.