Calculating overtime in California is extra complex because state and federal rules differ. Additionally, base rate calculations get complicated with commissions, bonuses, and other payments. What pay can be excluded when calculating the regular rate? How can employers be sure to be legally compliant in the calculations?
Calculating Overtime in California: First Determine the Regular Rate of Pay
The first step for calculating overtime is to determine the regular rate of pay, as this is the rate that is multiplied to determine the overtime amount owed. The simplest regular rate calculation is when an employee is simply paid one hourly rate and nothing else – this is the regular rate; however, it’s not usually that simple. Oftentimes, an employee is not compensated by a simple hourly rate or perhaps he or she is paid hourly but receives additional compensation, such as a bonus, which must be added in.
In these cases, normally the way to calculate the regular rate is to add up all compensation for week and divide by 40 (hours). This is already an important distinction from the federal way to calculate the regular rate—California does not allow the federal “fluctuating workweek” method of calculating regular rate, i.e., dividing the total compensation for the week by the number of hours actually worked instead of 40. Employers with operations in multiple states need to be especially careful.
What compensation must be included in the regular rate calculation? In general, include all compensation in calculating regular rate, including items such as:
- Shift differential pay
- Piece rate pay
- Production bonuses
- Commissions
- Stipends for being on call
- Fair value of non-cash compensation such as employer-provided meals or lodging
But what can be excluded?
Calculating Overtime in California: What Can be Excluded from the Regular Rate?
While generally all compensation needs to be included, there are some specific exemptions. “The biggest issues that often come up are the notion that the company does not have to count (and can exclude) a discretionary bonus, or profit share payment, or a gift, or a reward, the amount of which is not determined based on the number of hours that the employee worked, or on his or her production or efficiency.” Allen M. Kato explained in a recent CER webinar. These are all valid exclusions. Conversely, if the bonus is a production bonus (i.e. it is determined by hours worked, production level, or efficiency), then it must be counted. This is a danger point – “do not call something a discretionary bonus just to be able to exclude it from computing the regular rate, if in actuality the bonus is a production bonus and should be included in the regular rate calculation.” Kato advised.
There are other exclusions as well. Holiday pay or sick pay can be excluded, for example, because this is pay for time that was not hours worked. Additionally, the overtime pay itself need not be counted in calculating the regular rate. The same goes for premium pay for things like reporting time, call back pay, and premium pay for missed meal periods or rest breaks—otherwise you’re paying overtime twice on those amounts. As you can see, this is a complex issue; seek appropriate counsel if you have questions.
The above information is excerpted from the webinar titled “How to Calculate Overtime in California: 24×7 Schedules, Blended Rates, and Other Challenges.” 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.