Calculation of overtime in California differs from other states in regard to what hours count toward the total hours worked in the week, and that’s just the beginning. Even the best HR professionals can find the topic of paying overtime in California perplexing.
Questions arise about what exactly constitutes the regular rate of pay, which is necessary for determining how much overtime compensation is owed. You must take into account commissions, bonuses, and other payments. Particularly vexing is how to compute the overtime pay on a bonus that rewards employees for a quarter, a year, or another set period of time. And what happens to the regular pay rate calculation when an employee works in two job classifications that are paid different hourly rates? How can you ensure that you’re accurately paying overtime at a blended rate?
In a CER webinar titled “Overtime Pay in California: HR’s Pay Practice How-To,” Allen Kato outlined answers to these very questions. In this article, we’ll discuss some tips on how to calculate the regular rate of pay, which is the basis for calculating your overtime in California.
Calculating Overtime in California: What Must be Included in ’Regular Rate’ Calculations
To calculate overtime pay, we need to calculate the “regular rate” of pay for each workweek. Normally, we do this by adding up all compensation for week and divide by 40 (hours) in the week. Calculating overtime in California, however, does not allow the federal “fluctuating workweek” method of calculating the regular rate, i.e., dividing the compensation for week by number of hours actually worked. This is a trap for the inexperienced – this is not how it should be calculated in California.
By including all compensation, this allows us to incorporate compensation above and beyond the standard hourly rate when determining how much the overtime rate should be. As such, include all compensation in calculating regular rate, such as (list not exhaustive):
- Shift differential pay
- Piece rate pay
- Production bonuses
- Commissions
- Stipends for being on call
However, you may exclude some items from the regular rate computation:
- Discretionary bonuses
- Profit sharing
- Amounts paid as gifts
- Rewards for service
Basically, things that can be excluded must not be determined by or based on the number of hours worked, production or efficiency. (Be careful not to call something discretionary if it truly is calculated based on productivity!)
Additionally, Kato advised, “you can exclude from the regular rate calculation, holiday or sick pay, or other compensation . . . that are not compensation for hours worked,” such as reporting time and call back pay, and premium pay for missed meal periods, rest breaks or overtime pay itself (so that you don’t pay overtime twice).
You also don’t have to include the value or income from stock option awards to non-exempt employees or for the employees’ participation in employee stock purchase programs . This exclusion must meet certain requirements and is more complex than the other calculations – seek appropriate counsel on these types of calculations!
These are just some basics on how to determine the regular rate of pay as the basis for overtime pay calculation, but this is just the tip of the iceberg. Calculating the correct overtime in California can be complex. Are you prepared?
To register for a future webinar, visit CER webinars.
Allen Kato is an attorney in the Employment Practices Group of Fenwick & West LLP in San Francisco. His practice concentrates exclusively on representing management in equal employment opportunity, wage and hour, wrongful termination, privacy, unfair competition, and trade secret matters, and litigating individual and class action lawsuits before courts and agencies.
It seems like bonuses often get overlooked–perhaps because of confusion over just what is and isn’t a discretionary bonus?
It seems like bonuses often get overlooked–perhaps because of confusion over just what is and isn’t a discretionary bonus?