Do Your Overtime Calculations Fall Short?
Non-exempt hourly employees in California must be paid at an overtime rate of pay for overtime hours. The overtime rate is calculated by applying a multiplier of 1.5 or 2.0 to the employees' "regular rate of pay." The regular rate of pay is often the employees' straight time rate of pay, but not always. Many employers unwittingly fail to include other types of compensation when calculating the regular rate of pay, which can result in significant liability. Recent class action filings demonstrate the risk of these miscalculations.
The rule in California is that the regular rate of pay must include all remuneration from the employer. Take for example, restaurant employees who receive a free lunch and dinner during their shifts. If their rate of pay is $10 per hour, in an eight hour shift they will be paid $80. However, their regular rate of pay must be calculated by adding $80 to the cost of the meals (figured as the lesser of their actual cost to the employer or the fair market value). If each meal costs the employer $7, that is the equivalent of an extra $14 per day in compensation. The employees are therefore receiving a total of $94 per day in compensation, or a "regular rate of pay" of $11.75 per hour. Accordingly, the employees' overtime rate would be $17.63, not the $15 that might be expected for a $10 per hour employee.
In this example, failure to properly calculate the regular rate of pay would result in a shortfall of $2.63 for every overtime hour worked, leading to potential liability for penalties under PAGA and Labor Code Section 203, liquidated damages under the FLSA, interest, and attorneys' fees. These shortfalls are more common than is often realized and can result from payment of many kinds of bonuses or incentives, mandatory gratuities (such as a mandatory 15% tip for groups of 5 or more at a restaurant), free or subsidized lodging, or winning a free trip or prize for hitting a sales target. If you offer any kind of discount, bonus, incentive, reward, or anything of any kind of value to your hourly employees beyond their base wages, we recommend that that you include it in your regular rate of pay calculations or ensure that an exception applies. Although exceptions do exist for certain categories, the exceptions are limited and highly fact-specific.