In a case of first impression, the U.S. Court of Appeals for the Third Circuit has upended a lower court's ruling that all employees' incentives and bonuses from third parties count as remuneration under the Fair Labor Standards Act.

A three-judge appellate panel consisting of Third Circuit Chief Judge D. Brooks Smith and Judges Kent A. Jordan and Marjorie O. Rendell affirmed in part and reversed in part the ruling of a Pennsylvania federal judge in Secretary United States Department of Labor v. Bristol Excavating.

The case involved employees from an excavation company who were allowed to accept safety and efficiency "pace-setter" bonuses from an energy company, Talisman, with which the excavator was contracted, according to Jordan's Tuesday precedential opinion. A Department of Labor auditor later visited Bristol Excavating for a routine inspection to ensure overtime was being properly calculated and determined that the company should have been factoring in the Talisman bonuses as part of the employees' standard pay rate.

As a result of this finding, the DOL ordered Bristol to begin paying a higher overtime rate, Jordan said. When Bristol refused, the DOL sued Bristol for FLSA violations.

Bristol was found to have violated the FLSA by the lower court, which concluded that the company was subject to liquidated damages. However, the court denied the DOL's request for an injunction.

On appeal, Bristol argued that the bonuses were not remuneration for employment or, in the alternative, that they qualified for a statutory exemption. The DOL maintained "the payments are indisputably remuneration for employment … because they are payments made to Bristol's employees that are directly tied to the hours and quality of work that the employees performed for Bristol," according to the department's court papers.

Jordan said the court erred in lumping all forms of third-party bonuses together as remuneration.

"Instead, whether a payment qualifies as remuneration for employment depends on the employer's and employee's agreement," Jordan said. "Under the correct legal standard, and on the record before us, there is a genuine dispute of material fact as to whether the efficiency and pacesetter bonuses are remuneration for employment, so we will vacate in part the district court's judgment and remand for further consideration of those bonuses. But, we conclude that the safety bonus is remuneration for employment and is not subject to a statutory exemption, and thus we will affirm the district court's judgment as to that bonus."

Harold G. Caldwell of Brann Williams Caldwell & Sheetz argued the case on behalf of Bristol and did not respond to a request for comment.

Rachel Goldberg of the Department of Labor represented the agency and did not respond to a request for comment.