“The number one violation that I’m seeing right now amongst employers is confusion over the concept of hours worked and regular rate.” attorney Mark Jacobs noted the audience in a recent CER webinar.
He’s talking about wage and hour violations—specifically, calculating overtime pay. When an employer calculates the overtime pay owed to an employee, the very first step is to determine the regular rate of pay—that’s the rate that will be used for the calculation of the overtime pay. For some employees, it really is simply their hourly pay rate, but for many others, it’s not that simple.
Several other types of pay, such as commissions and incentive payments, must be added into the calculation of the regular rate—even if those payments aren’t made until after the pay period is over. Let’s take a closer look at the regular rate and one of the most common miscalculations: bonus payments.
What is the Regular Rate of Pay?
“The regular rate is defined as the actual rate in effect per hour.” Jacobs advised. In essence, the regular rate is all earnings, less statutory exclusions, divided by all hours worked.
Here are the statutory exclusions from the regular rate:
- Paid leave
- Uncontrolled standby
- Call back pay
- Reporting time pay
- Penalties paid for not providing meal or rest periods
- Split-shift premium hour paid
None of these earnings, by law, have to be included in the regular rate.
Bonuses: Common stumbling block in regular rate calculations
The number one problem with calculating regular rate is forgetting to include bonuses or other incentive payments when required to do so. Generally, bonuses are part of regular rate unless they are truly discretionary, i.e., not contingent on any performance criteria.
Under federal regulations, a bonus is discretionary only if “both the fact that payment is to be made and the amount of the payment are determined at the sole discretion of the employer at or near the end of the period and not pursuant to any prior contract, agreement, or promise causing the employee to expect such payments regularly.”
The California Labor Commissioner interprets a bonus as discretionary only when there are “no objective criteria” involved and the bonus is “not routine.”
As such, asking whether the bonus is discretionary is the first step to determining whether it needs to be included. If the bonus is truly discretionary, it does not need to be included in the regular rate.
“The problem is, most managers will respond by saying: ‘Oh absolutely, the bonus is completely discretionary because I get to decide whether or not to pay it and how much it is.’ The problem is, if you push back on that manager, you’ll find out that really, yes there’s some discretion, but generally the bonus is contingent on some sort of performance criteria.” Jacobs warned.
A Christmas bonus might be a good example of a truly discretionary bonus. But paying a bonus for having a very profitable month probably is not—it has performance criteria (profit) that was met before it was paid.
The above information is excerpted from the webinar “Calculating Overtime in California: How to Avoid Computational Errors and Master Your Wage and Hour Obligations.” To register for a future webinar, visit CER webinars.
Attorney Mark Jacobs is a partner in the Irvine office of Fisher & Phillips LLP. His practice is focused on defending employment-related lawsuits and administrative complaints on a variety of issues, including harassment, retaliation, and discrimination.