This is the fourth post in our monthly series of CDF’s Labor & Employment Law Blog providing California employers with wage and hour compliance tips and best practices.

In California, non-exempt employees who are not part of a proper alternative workweek schedule are entitled to overtime wages at one and one-half times the employee’s regular rate of pay for any time worked over (a) eight (8) hours in a single workday, (b) forty (40) hours in a single workweek, or (c) six (6) days in a single workweek. Further, overtime is paid out at double an employee’s regular rate of pay for any time worked (a) in excess of twelve (12) hours in a single workday or (b) in excess of eight (8) hours on the seventh day of a workweek.

For many employees, the calculation is simple enough using the employee’s base hourly rate multiplied by either 1.5 or 2.0 to determine the Overtime or Double Overtime rate for the corresponding hours in accordance with the above requirements. However, the regular rate of pay calculation may become increasingly more complicated when other forms of remuneration, such as incentives, are paid out, or when an employee is paid at multiple rates.

Below is a list of some of the primary forms of other “remuneration” that employees may receive as well as a discussion of when such payments may or may not impact the regular rate of pay calculation:

• Discretionary v. Non-Discretionary Bonuses: If a bonus is discretionary, it can be excluded from the regular rate of pay calculation, whereas a non-discretionary bonus needs to be factored into the regular rate. Simple enough, right? However, for a bonus to truly be discretionary, and thus not factored into the regular rate calculation for payment of overtime hours, whether or not payment is made needs to be at the sole discretion of the employer and made at or near the time it is paid out and not based on any promise or prior agreement. Simply calling a bonus “discretionary” or even a bonus plan that may contain certain discretionary elements does not necessarily make it truly optional or at the sole discretion of the employer. Non-discretionary bonuses, on the other hand, are intended to incentivize employees in some way and may include bonuses for productivity, hitting certain metrics, or even attendance goals. Generally, a non-discretionary bonus is one that is paid out under a prior agreement, contract, or promise, as well as one that is based on a specific formula or metrics being triggered. However, the line between a discretionary and non-discretionary bonus may get blurred when it has elements of both, making the determination of whether it should be factored into the regular rate of pay calculation less clear-cut at times. In close cases, many judges in the California courts and California Labor Commissioner tend to side with the employees. Simply calling a bonus “discretionary” or one that has a modicum of ultimate discretion does not necessarily make it discretionary.
• Other Bonuses: Even within this above distinction, certain bonuses may not fall squarely within these parameters. For example, a hiring bonus paid out at the start of employment is generally not dependent or tied to any performance metrics or length of employment and therefore is not intended to incentivize any future behavior where it could likely be excluded from the regular rate of pay calculation. However, when such a bonus is also tied to a retention requirement or length of service scale it begins to incorporate certain formulaic elements and/or future incentives that likely shifts such a bonus into the realm of being non-discretionary and therefore a factor for the regular rate of pay calculation. To further complicate matters, flat sum bonuses (ones that do not operate to increase/decrease in proportion with hours worked) and percentage bonuses (paid on a percentage of gross wages when benchmarks are met) may appropriately be calculated in a variety of methods for determining regular rate of pay and thus overtime payment rates, as reported in CDF’s prior blog posts:
  • Appellate Court Holds That Percentage Bonuses Can Be Calculated Using FLSA Method
  • California Supreme Court Instructs on How California Employers Must Calculate Overtime on a Flat, Non-Production Bonus

Certain statutory exclusions from the regular rate of pay calculation do exist however, and below is a list of some of the more common exclusions:

• Gifts: Sums paid out occasionally, like a holiday bonus, and that are truly independent of an employee’s hours worked or production are not included in the regular rate of pay calculation.
• Reimbursements: Sums paid to reimburse an employee for reasonable business expenses incurred, like a portion of a personal cellphone or home internet plan, are generally not included in the regular rate of pay calculation provided the reimbursement or stipend is separately allocated and for reimbursement purposes. Simply increasing an employee’s hourly rate to offset certain business expenses incurred, perhaps related to a work-from-home environment, may create issues if excluded.
• Benefit Contributions: Sums paid by an employer for benefit plans, such as health insurance or retirement plans, are generally not considered in the regular rate of pay calculation as these contributions are not considered wages, provided the plan meets certain requirements.

Ensuring that the regular rate of pay calculation is being done correctly is imperative to ensure that employees are being properly compensated. Getting this wrong potentially opens the company up to possible liability far greater than the underpayment itself, which may be very minimal on any given paycheck, especially when little overtime is accrued. The reason is that the regular rate of pay calculation does not only impact overtime rates, but is also the calculation used to determine the proper amount for payment of meal and rest break premiums, as reported here in CDF’s prior blog post, and possibly other forms of remuneration such as PTO. Getting this calculation slightly wrong may result in an underpayment, which can trigger other penalties such as wage statement violations or waiting time penalties that may far exceed any actual underpayments. Moreover, these calculations many times are not set up by individual employees, meaning that a failure to include a requisite sum in the regular rate of pay calculation generally applies to a number of employees making such claims subject to representative class or PAGA actions. In the last few years, our firm has been asked to defend many PAGA actions based on failure to properly include or calculate the regular rate of pay.

While the regular rate of pay calculation appears relatively straightforward on its face, the precise inputs may be less than clear. Employers should review their current pay practices to ensure this calculation is being computed properly.