The Obama administration recently increased commuter tax benefits making them more appealing to employers. State legislatures are also considering laws requiring employers to provide transit subsidies to employees. If an employer decides to provide commuter benefits to its employees, or such benefits are required by state law, the employer must also consider its wage and hour obligations. Most employers are, unfortunately, not aware that commuter subsidies must be included when calculating an employee’s regular rate for overtime purposes.

The federal Fair Labor Standards Act (FLSA) explicitly includes commuting expenses in the regular rate. "An employee normally incurs expenses in traveling to and from work, buying lunch, paying rent, and the like. If the employer reimburses him for these normal everyday expenses, the payment is not excluded from the regular rate". 29 C.F.R. § 778.21.

There is only one reported decision, under either federal or state law, that addresses this issue. The facts of the case are simple. The Montana Department of Transportation agreed in a collective bargaining agreement to pay its employees’ commuting expenses, but did not include these expenses in their regular rate calculations when computing overtime. See Montana Public Employee’s Association v.Dep’t of Transportation, 954 P.2d 21 (Mont. 1998). The union alleged that the state had violated the FLSA and the Supreme Court of Montana agreed, finding that the commuting expenses should have been included in the regular rate.

Section 778.217(d) undermines commuter benefits laws by acting as an inducement for employers not to provide transit subsidies. For example, employers that allow their employees to pay for commuting costs through pre-tax deductions obtain commuter tax benefits and do not incur any additional overtime liability. Conversely, more generous employers that subsidize employees commuting expenses incur overtime liability, which negates the effect of the tax benefit.

There may be a creative solution to this dilemma. Most employers who provide transit subsidies do so through a third party. Employers who provide commuter benefits through a trust or benefit plan should be able to exclude such benefits from the regular rate. The relevant DOL regulation provides that irrevocable contributions to a trust or third party that provides for “old age, retirement, life, accident, or health insurance or similar benefits for employees” are excluded from the regular rate. See 29 C.F.R. § 778.214 In order to qualify for this trust or benefits exemption, the employer must meet the five-part test outlined at 29 C.F.R. § 778.215.

It is unclear whether the DOL or a court would agree that a commuter benefit plan falls within this definition as “a similar [employee] benefit.” Some may argue that this provision should be limited to health and retirement plans. Commuter benefit plans are beneficial for employees, employers, and the environment. As it is in the public interest for employers to provide these subsidies, it is likely that if asked to opine on the issue, the Wage Hour Administrator would find that commuter subsidies are excluded from regular rate if they are provided through a qualified plan or third party. In the absence of such guidance from the DOL, employers should be cautious about structuring these benefits in consideration of their wage and hour obligations.

This blog entry was authored by Salvador Simao.