Early in my career I worked in a service business where payroll costs could make or break the company. Sales were up? Raise payroll a bit. Sales down? Cut payroll immediately. It was a weekly up and down and hard on everyone. And Overtime – You’ve got to be kidding me?!!! NO way was overtime allowed. The payroll dance was a lot easier to manage until I arrived in California. The daily overtime requirement became another hurdle as managers were hauling people out the door to avoid overtime after 8 hours in the workday. (And who knows how many people worked over 8 hours but never recorded it?) It was tough to be solvent when we were (and still are) competing with businesses in other states that did not have the daily overtime laws.
Many employers don’t know about a long standing federal law (nope, CA didn’t invent this one) that adds additional calculation and expense to overtime calculations; it’s called the regular rate of pay (RRP). In essence, when a non-exempt employee works overtime in a work week, the federal law requires that the employer calculate the employee’s overtime based on his/her regular rate of pay for that work week. It’s not just the base pay rate times 1.5 or 2 to get the overtime pay. And that misstep can result in significant penalties and back pay for employers.
Here’s a quick primer on what the regular rate of pay entails:
The regular rate of pay for the seven-day work week (and you only need this if the non-exempt employee is working overtime[1]) includes all pay the employee earned for work performed in that week. Payments that are applied to the RRP include:
non-discretionary bonuses, commissions, shift differentials, on-call pay, gift cards, prizes or awards related to work, hazardous duty pay, bonus based on profitability, employee of the month bonus, retention bonuses, safety bonuses, payments in lieu of benefits such as declining health insurance, lodging discounts, public transportation benefits and the list goes on.
Employers do not have to include the following in calculating the regular rate of pay: value of employee health and welfare benefits, missed meal/rest premiums, discretionary bonuses, payments for time not worked (holiday, vacation, sick leave) business expense reimbursements, and others the courts are not clear on yet. When in doubt, include it.
Once all the compensation has been included in the total earned for the week, the federal (and usually CA) RRP calculation is based on a simple formula: All “remuneration for employment” paid to the employee in the work week divided by all the hours worked in the work week. For example:
An employee earns $11/hour and works 45 hours in the seven-day work week. The employee also receives a $100 non-discretionary bonus that week. The RRP is ($495 + $100)/45 = $13.22/hour. The overtime is paid at one-half the RRP, so $13.22/2 = $6.61 X 5 overtime hours =$33.06[2]. Total wages earned for the work week are $495 + $100 + $33.06 = $628.06
Adding to the complexity of the RRP is when an employee in a single workweek works at two or more different straight-time rate, such as travel time and base pay. In those cases, the RRP for that week is the weighted average of such rates. That is, the earnings from all such rates are added together and this total is then divided by the total number of hours worked at all jobs.
Recently the California Supreme Court ruled in Alvarado v. Dart Container Corporation of California that CA employers must use a different RRP calculation for employees who are paid a flat sum bonus in a workweek in which overtime is incurred. Although CA employers normally use the federal calculation for RRP, the CA Supreme Court ruled that the in the particular case of flat rate bonuses (in this case a flat bonus for working a weekend) the employer should use a different formula: divide the total compensation earned in a pay period by only the non-overtime hours worked by an employee.
When it’s the 11th hour before payroll is due and you are in doubt about calculating overtime and the RRP, include everything in the earnings for the week and use the denominator that most benefits the employee. That’s the most immediate response. However, if you have questions about calculating the regular rate of pay, and particularly what payments should be included in the calculation, we advise you speak with your legal counsel. There are significant retroactive fines and you will want privileged conversation for advice.
The CA Department of Industrial Relations has a nice overview of overtime here.
[1] In CA overtime is due when the employee works more than 8 hours in a day (1.5 times the RRP), 12 hours in a day (2 times the RRP), 40 hours in a week (1.5 times the RRP) or on the 7th consecutive day worked in a single workweek (1.5 times the RRP).
[2] It is important that the overtime rate on the wage statement is listed as the full rate (in this example, $19.83/hour) and not half the RRP.