HR Management & Compliance

Wage And Hour: Workers Charge Employer Didn’t Calculate Overtime Correctly; Helpful Pointers

Calculating overtime is usually a straightforward process of multiplying the worker’s regular hourly rate by one and a half. However, a recent Ninth Circuit Court of Appeals case illustrates that the computation is more complex if you pay an employee a flat rate per day. That’s because you need to figure out what the hourly rate is for overtime purposes, and the federal and state rules differ on how to do it.

Regular Rate Disputed

Meter readers for Southern California Gas Co. were paid a fixed amount for completing their routes, even if they took less time than the utility estimated they needed. When they worked more than eight hours in one day, their union contract provided for premium pay based on a set formula.


The HR Management & Compliance Report: How To Comply with California Wage & Hour Law, explains everything you need to know to stay in compliance with the state’s complex and ever-changing rules, laws, and regulations in this area. Coverage on bonuses, meal and rest breaks, overtime, alternative workweeks, final paychecks, and more.


The meter readers sued, claiming the overtime formula used by SCGC violated California wage and hour laws. The employees charged that although SCGC paid one and a half times the “regular hourly rate” for overtime hours, it improperly determined the hourly rate by dividing the flat daily pay rate by the number of hours it actually took to complete the route, including overtime hours. They argued that under California law the overtime hours should not have been included in the computation. Doing so resulted in a lower regular hourly rate and, therefore, a lower overtime rate as well.

The Court of Appeals said that because the union contract provisions were in dispute, federal—not California—law applied. And under federal law, the overtime rate can be calculated by dividing the flat rate by the total hours worked, including overtime. As a result, the meter readers’ case was dismissed.

How To CalculateOvertime

Although federal law was followed in this case because it involved a union contract, state law usually determines how to figure overtime for California workers paid a flat rate. It works like this: Compute the employee’s regular hourly rate by dividing their total pay for the week by the agreed number of hours in the workweek, but not by more than the maximum straight-time hours the employee has worked in the week (usually 40 hours). Then multiply the regular hourly rate by one and a half for all hours worked over eight in a day or 40 in a week.

Some Compensation Not Included

In addition to not being clear on how to calculate the regular hourly rate, employers have also gotten tripped up over whether to include certain forms of compensation in this rate for overtime purposes. For example, a bonus based on production would have to be included in computing the overtime rate.

Here is a rundown of the types of payments that are generally not related to hours worked and therefore not included in calculating the regular hourly rate on which overtime is based:

     

  1. Gifts. These include holiday bonuses, so long as they are not tied to the number of hours worked during the year.

     

  2. Paid time off and expenses. Payments made for periods when no work is performed because of vacation, illness or lack of work, as well as travel expenses.

     

  3. Profit sharing. Payments under a profit sharing plan or other compensation determined at the employer’s sole discretion.

     

  4. Insurance and retirement contributions. Payments made under a retirement plan—or life, accident or health insurance or similar benefits.

     

  5. Holiday premium pay. Extra premium wages paid for work on weekends, holidays or regular days off.

 

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