United States: California's Regular Rate: Getting It Right Can Save Money

With the increasing focus on wage-and-hour litigation, the issue of an employee's "regular rate" arises in most every case involving alleged unpaid overtime.  It also factors into an employer's payroll, each and every pay period.  Here's a brief roadmap through this sometimes rocky terrain.   

The FLSA Formula For Defining The "Regular Rate"

Under the federal Fair Labor Standards Act (FLSA), the regular rate includes all compensation, earnings, or "remuneration" for work performed except certain kinds of payments specifically excluded, such as reimbursement for expenses incurred by an employee on the employer's behalf, or special situations such as reporting-time premiums, discretionary bonuses, and a few others including  vacation, or holiday pay. 

To avoid confusion and costly payroll errors, some of the "statutory" exclusions from the regular-rate formula may need to be further defined.  For example, a "non-discretionary" bonus is any bonus that is awarded based on performance or service and which employees can expect to be paid based upon the relevant criteria.  There are only limited situations that would permit a bonus to be called "discretionary," such as a Christmas bonus paid with no performance or service consideration.

There is a broad array of potential sources for an employee's "earnings," which may consist of payment by a piece-rate, salary, commission, or some other basis, but without regard to the particular method of payment.  Unless the employee earns only an hourly rate (in which case that generally will be the regular rate), the regular rate is calculated by dividing all earnings for the pay period (except for the statutory exclusions noted above) by the total number of hours actually worked.   The regular rate therefore is the average hourly rate resulting from the following fraction:

All weekly earnings/all hours worked = regular rate

The regular rate can never be less than the applicable statutory minimum wage.  If an employee is also paid a base hourly rate plus a bonus, the bonus amount must be added to the total week's compensation, resulting in a regular rate that is greater than the base hourly rate. 

Once determined, the regular rate is used to calculate overtime.  Under federal law, that generally means 1.5 times all hours worked over 40 in a workweek.  Under California law, this premium must be paid for all hours worked in excess of eight hours in any workday and 40 hours in any workweek; or on the first eight hours worked on the seventh consecutive day of work in any workweek.  Additionally, employees are entitled to double their regular rate of pay for all hours worked in excess of 12 hours in any workday; and for all hours worked in excess of eight on the seventh consecutive day of work in a workweek.  Special overtime zones exist for employees working under a properly-implemented alternative workweek. 

Under both federal and state law, there are "exemptions" or "exceptions" to the general overtime requirements which may apply to various occupations or industries. They are narrowly interpreted, and the law most favorable to the employee generally will apply in any particular situation.

The California "Regular Rate" Formula

California generally follows federal regulations regarding the calculation of the regular rate.  If an employee is paid by a piece rate or commission basis, one of two methods may be used to determine the regular rate and overtime: 1) the piece or commission rate may be used as the regular rate and the employee is paid 1.5 times this rate for production for regular overtime hours and double this rate for double-time hours during the week; or 2) the standard regular rate is determined by dividing total earnings for the workweek by the total hours worked during the workweek.  Under the second method, for each overtime hour worked, the employee is entitled to an additional ½ of the regular rate for hours requiring payment at 1.5 times the regular rate, and to the full rate for hours requiring double time. This method is by far the most commonly used.

Differences between federal and state law exist for calculating a salaried employee's regular rate and overtime.  A nonexempt employee's salary paid for a period in excess of a workweek first must be reduced to its workweek equivalent to reach the regular rate.  For example, if the salary is $2,000 per month, you would  multiply this amount times 12, then divide the result by 52 weeks to get the equivalent weekly salary ($461.54).  In California, the regular rate for a salaried nonexempt employee is deemed to be 1/40th of the employee's weekly salary, which must at least be the minimum wage.  Under federal law, if a nonexempt employee is employed solely on a weekly basis, the regular hourly rate is determined by dividing the weekly salary by the fixed number of hours the salary is intended to compensate. 

Alternatively, if the employee's hours are expected to fluctuate from week to week, under the "fluctuating workweek" method, the salary may be paid under an agreement that the salary covers however many hours are worked in a workweek, with the regular rate determined by dividing the weekly salary by the total number of hours worked in the workweek.  Overtime is then paid at ½ of the regular rate times each overtime hour worked.  The difference in overtime owed is significant.  If an employee works 50 hours including 10 hours overtime, with a weekly salary of $1000, the employee would earn $100 in overtime under federal law and $375 in overtime under California law.

For employees paid a daily guarantee or "day rate," which is paid regardless of the number of daily hours worked, the California Labor Commissioner takes the position that, ordinarily, the hours to be used in computing the regular rate of pay may not exceed the legal maximum regular hours which, in most cases, is eight hours per workday, 40 hours per workweek.  Again, the resulting rate must at least be the applicable minimum wage.  Once again, the results under federal and California law are strikingly different.  If an employee works 10 hours each day for 5 days, at $200 per day rate, the employee has earned $1,000 for the week, but the employee generally would earn only $100 overtime under federal law and $375 under California law.

Blended Regular Rates

Where an employee in a single workweek works at two or more different types of work for which different straight-time rates have been established, the regular rate for that week is the weighted average of such rates. For example, suppose an employee works a total of 42 hours for the workweek: 32 hours at $11.00 per hour plus 10 hours at $9.00 per hour.  In this case, the weighted average (or "regular rate") is $10.52. This rate is calculated by adding the $442 straight time pay for the workweek [(32 hours x $11.00/hour) + (10 hours x $9.00/hour) = $442] then dividing this amount by the 42 hours worked for the week.  Overtime is paid at ½ times the regular rate of $10.52 x 2 overtime hours = $10.52. 

Employers therefore must be cautious when paying different hourly rates, or hourly rates with separate piece rates for piece work, because the overtime premium will be blended after factoring in all other rates times the hours worked at those rates.  Additionally, the "rate-in-effect" method for paying hourly-rate overtime rarely applies in California, except in specified situations such as when an employee is being paid a "prevailing wage" for a public works project.

California also generally recognizes a "group regular rate" methodology for computing the regular rate of pay involving piece-rate, formula, or incentive pay workers.  This method generally involves a formula whereby the total group's compensation is divided by the total number of people in the group, with each employee being paid his or her share.  The regular rate for each worker is determined by dividing the pay received by the number of hours worked respectively. Of course, the regular rate cannot be less than the minimum wage.

No Manipulation To Avoid Overtime

In California, the regular rate is designed to further a two-fold public policy underlying overtime: 1) to spread employment by encouraging employers to avoid overtime work and thereby employ additional workers on a regular basis; and 2) where the employer prefers overtime work, to compensate the employee for the burden of working longer hours.  Any methodology that seeks to undermine the regular rate to avoid payment of an overtime premium may be invalidated by the courts or the California Labor Commissioner as a subterfuge. 

For example, an employer cannot first calculate weekly pay at the base piece or incentive rate, then avoid overtime by reducing those base rates so that the employee always receives the same level of compensation without an overtime premium based on the original rates.

Conclusion

Employers should do frequent regular rate tune-ups by consulting with their legal counsel and conducting internal audits on a regular basis.  The calculation of the regular rate can be extremely complex when combining different pay schemes and incentive rates, but getting the number right can make thousands of dollars difference in the calculation of overtime.  This can make all the difference in the end, both in calculating damages when claims are made, or in getting it right when calculating overtime during payroll. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Masuda, Funai, Eifert & Mitchell, Ltd.
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Masuda, Funai, Eifert & Mitchell, Ltd.
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions