Failing to correctly calculate an employee’s regular rate of pay can be incredibly expensive for an employer. Therefore, knowing how to correctly calculate an employee’s regular rate of pay is extremely important. Federal and California law require that overtime be paid at 1.5 time an employee’s regular rate of pay. In addition, the rate at which California’s paid sick leave benefits are paid is based on a nonexempt employee’s regular rate of pay.
The issue …
California employers have been long confused about how to properly calculate an employee’s regular rate of pay when the employee is paid a nondiscretionary bonus. However, a recent California Court of Appeal decision (Alvarado v. Dart Container Corp. of California) gives employers some much-needed guidance on this issue.
The problem …
The place an employer would normally turn for guidance, the California Labor Code, does not address how this calculation should be performed. Absent any statutory guidance, employers have two competing sources from which they can seek guidance – the US Department of Labor (DOL) (via the Fair Labor Standard Act regulations) or the Department of Labor Standards Enforcement (DLSE).
The DOL and the DLSE do not agree on how the regular rate of pay should be calculated and their different formulas provide incredibly different results.
The FLSA regulations state that an employer can calculate the regular rate of pay by simply adding the bonus to the other includable compensation paid and then dividing the sum by the total number of hours worked.
For example: An employee works 46 hours in a week, earns $12 an hour, and receives a $46 production bonus for the week. Under the FLSA formula, the regular rate of pay would be $13 an hour [(46 hours x $12/hour) + $46 bonus] / 46 hours].
Meanwhile, the DLSE has taken a different stance. The DLSE opined that the regular rate of pay can only be determined from the straight-time hours worked. In other words, the regular rate must be the sum of all compensation divided by only the regular (non-overtime) hours worked.
Another example: Under the DLSE formula, the regular rate of pay would be $13.15 an hour [(40 hours x $12/hour) + $46 bonus] / 40 hours]
As shown above, the DLSE’s method results in a higher regular rate of pay and therefore higher overtime wages paid to the employee.
The question … which method should California employers use?
Absent any guidance, California employers were left to choose which method to use to calculate the regular rate of pay. In the Alvarado case, the employer chose to use the FLSA method and was sued by a former employee for unpaid wages. The employee’s claim was that the employer’s use of the FLSA method to calculate his regular rate of pay was improper and result in an underpayment of wages.
In a surprising (for California) decision, the Court of Appeal ruled that an employer’s use of the FLSA method to calculate an employee’s regular rate of pay when determining the overtime premium pay owed on a “flat sum” bonus was proper. Therefore, the employer did not owe the employee any unpaid wages.
This is an important victory for employers and proves that, at least when calculating the regular rate of pay, California will conform with federal regulations.