In a recent CER webinar titled “Exempt v. Non-Exempt in California: How to Evaluate Classifications to Determine If Employees are Entitled to Overtime,” Mark J. Jacobs and Ryan D. Wheeler outlined some guidance for California employers regarding proper employee classifications and correct calculations of overtime pay. They kindly lent their expertise to answer questions from the participants after the webinar concluded. Here are some of the questions you may be wondering about as well, broken down by topic.
Must Bonuses be Included into the Regular Rate of Pay for the Purposes of Calculating Overtime Pay?
Q. What if we pay an incentive that is nondiscretionary and is paid on a quarterly basis? Must this be included when determining an employee’s regular rate of pay for the purposes of overtime pay calculations?
A. Discretionary bonuses, like a Christmas bonus, do not need to be included in the regular rate. Nondiscretionary bonuses, commissions, and other compensation have to be included in the regular rate. Since this question references a nondiscretionary quarterly bonus, chances are it probably does need to be included in the regular rate. Administratively this becomes problematic because you have to spread those earnings out over the work weeks that comprised that quarter, and then, to the extent that there was overtime, pay it.
For example, let’s assume the quarterly bonus is $1,000; for our purposes you would attribute $250 per month and then do another analysis as to the amount per week and see if any overtime was earned in those weeks. The good news is that the overtime obligation on a bonus like this will likely be small; but the bad news is that the administrative burden is high. However, your payroll software may complete the calculation for you.
Q. If we give an annual bonus that is not determined ahead of time, but is based on the employee’s annual appraisal score, would this be considered discretionary? If it must be included in earnings, do we have to factor it into the regular rate for overtime for the whole year?
A. The answer is yes, if it’s nondiscretionary. Based on the specifics noted in the question, that’s a close call. Since there is a component of criteria to it, it could be easy to argue that it is nondiscretionary, and thus it must be used in the regular rate calculations as you described. The conservative advice would be to assume it does need to be included in the regular rate.
Nonexempt vs. Exempt Employees
Q. Can an employer dock sick and/or vacation pay by the minute for exempt employees? For example, an exempt employee leaves one hour early for a doctor’s appointment—do they have to use sick time?
A. No, you cannot do it by the minute. The conservative advice here is you can dock from vacation or sick leave in an increment of no less than 4 hours (as a general rule). There are bigger issues at play here, however. If a salaried exempt employee comes into work today and works for two hours and then leaves for an appointment for the rest of the day, that person has to get paid for the entire day. The question really is whether or not some of that can be offset by taking some time out from a leave bank. The answer to that question is yes, but it has to be in an increment of four hours. Conceptually, however, it’s important to know than an exempt employee will need to be paid for the whole day if any work is performed that day.
Q. California has an hourly pay requirement for physicians of $70.38. Is this the basis for the salary test for exemption?
A. No. What you’re referring to is a fee-basis for doctors. The exemption for the white-collar exemption is completely distinct from that.
Alternative Work Schedules and Overtime Pay
Q. Are alternate work weeks allowed in California without being liable for overtime over 8 hours per day? For example, can we implement an alternative schedule that allows employees to work four 10-hour days and have the next day off without being liable for 2 hours of overtime each day worked?
A. Excellent question. There is something called an alternative work schedule that does apply in California. If you have a bona fide alternative work schedule in place, that’s going to be recognized as legal under California law. However, a lot of employers drop the ball on one area, which creates tremendous exposure; the only way you have a legally recognized alternative work schedule is if you’ve sent a letter to the appropriate a division of the Department of Labor Standards Enforcement.
The letter must say when you implemented the alternative work schedule. The schedule must either have been in place before the latest overtime regulations went into effect or it must have been voted in by employees with a two-thirds vote. Without these requirements and the letter, your schedule is not legally recognized. You can look up your status online to see if the letter was sent and whether your company is listed as a workplace with an alternative work schedule.
Q. Can employees opt in and out of the alternative work schedule?
A. No. It is intended to be a fixed schedule, and cannot be seasonal or temporary. The code says that if you manipulate the alternative works schedule you call into question the credibility of the entire program. The law is worried about you having an alternative work schedule during the summer hours (because you’re busiest) but then you return to a regular, non-alternative work schedule for the rest of the year. That’s considered a subterfuge to try to avoid the overtime rules in California law. Employers have tried it, but it’s a violation.
Q. If an employer has an alternative work schedule in place, can some employees work the alternative schedule while others work a regular schedule?
A. The answer is maybe. After the department votes in the alternative work schedule, you can have an exception for certain employees. But you can’t simply implement an alternative work schedule on an individual-by-individual basis at the beginning.
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Attorney Mark J. Jacobs is a partner in the Irvine, California, office of Fisher & Phillips LLP. He focuses his practice on defending employment-related lawsuits and administrative complaints on a variety of issues, including harassment, retaliation, and discrimination.
Ryan Wheeler is an associate in the Irvine office. His practice includes counseling and defending employers in all areas of labor and employment law.