It is critical for California employers to properly calculate the regular rate of pay for an employee in order to pay the appropriate overtime pay and for premium pay for missed meal and rest breaks. Here are five issues employers must be aware of regarding calculating an employee’s regular rate of pay:
1. Employers must pay the “regular rate of pay” as calculated for overtime purposes when paying premium pay for missed meal and rest breaks.
As we previously reported, the California Supreme Court in Ferra v. Loews Hollywood Hotel, LLC held that the “regular rate of compensation” owed as premium wages for missed meal and rest breaks, must be calculated just as the “regular rate of pay” is calculated for overtime purposes. While the case discussed generally what must be included in the “regular rate of pay” calculations, there are many nuances to this calculation.
2. What compensation must be included in calculating employee’s regular rate of pay?
The DIR defines regular rate of pay as “the compensation an employee normally earns for the work they perform. The regular rate of pay includes a number of different kinds of renumeration, such as hourly earnings, salary, piecework earning, and commissions. In no case may the regular rate of pay be less than the applicable minimum wage.”
The Court in Ferra held that the “regular rate of pay” for missed meal breaks, just like the calculation of overtime pay, “must account for not only hourly wages but also other nondiscretionary payments for work performed by the employee.” The Court explained that, “We use the term ‘nondiscretionary payments’ to mean payments for an employee’s work that are owed ‘pursuant to [a] prior contract, agreement, or promise,’ not ‘determined at the sole discretion of the employer.’”
3. Examples of payments that must be calculated into the regular rate of pay.
In determining the regular rate of pay, employers must include the employee’s base hourly rate plus any amounts for:
- Shift differentials (such as premiums to work on weekends or holidays)
- Attendance bonuses, such as those earned for weekend work is a form of incentive pay
- Piece rate earnings
- Nondiscretionary pay and bonuses. The DIR explains, “A nondiscretionary bonus is included in determining the regular rate of pay for computing overtime when the bonus is compensation for hours worked, production or proficiency, or as an incentive to remain employed by the same employer.”
4. Examples of payments that are not included when calculating the employee’s regular rate of pay.
Unlike the nondiscretionary items listed above, an employee’s regular rate of pay does not increase for any of the following payments made to them:
- Discretionary payments made to employees, such as gifts or bonuses that are not tied to the employee’s production, hours worked, or by formula for certain benchmarks.
- Reimbursements for business expenses
- Certain pay owed as required by the Labor Code, such as premium pay for missed meal and rest breaks, reporting time pay, call back pay, split shift pay.
- Because tips are voluntarily left by customers to employees, tips do not increase an employee’s regular rate of pay for overtime calculations and premium pay. However, if an employer implements mandatory service charges and shares these service charges with employees, the service charges must be considered wages for overtime and tax purposes. Therefore, the employee’s regular rate of pay for overtime purposes and in calculating premium pay will be higher when mandatory service charges are distributed to the employees.
5. Employers must be aware of the proper calculation methods in determining the regular rate of pay.
Employers must carefully follow the different calculation methods to determine the employee’s regular rate of pay. For example, the DIR sets forth how employers are to calculate the regular rate of pay for non-exempt salary employees, employee’s paid by the piece or commission, and that employers are to use a “weighted average” method for employees paid two or more rates during the workweek. Employers must also be careful in how to calculate the regular rate of pay for nondiscretionary flat sum bonuses paid to employees. The calculations are complex, and employers need to review the appropriate calculation method to ensure the calculation is done properly.