In this episode of California Employment News, Weintraub attorneys Ryan Abernethy and Talia Delanoy revisit the complexities of the regular rate of pay—a frequent issue in wage and hour class actions. From bonuses and shift differentials to common employer mistakes, they break down what must (and must not) be included in calculations, and the costly risks of getting it wrong.

Watch this episode on the Weintraub YouTube channel.

Show Notes:

Ryan: Hello, everyone, and thank you for joining us for this installment of California Employment News, an informative video and podcast resource offered by the Labor and Employment Group here at Weintraub Tobin. My name is Ryan Abernethy, and I’m a shareholder in the firm’s Labor and Employment Group. I’m joined today by my partner, Talia Delanoy, who is new to our group, and this is her inaugural episode.

We’re happy to have her join our team here. Over three years ago now, Lukas Clary and I spoke with you about the regular rate of pay. But since the regular rate of pay is such a prevalent issue that is increasingly featured in Wage and Hour class actions that we’re seeing pouring in. We wanted to revisit that topic today.

Talia, why don’t you start us off by giving us a refresher with some basic information about the regular rate of pay, what it is exactly, and what needs to be included within it.

Talia: Yes, absolutely. Thank you, Ryan. Most employers assume that the base rate of pay and employees regular hourly rate is all they need to think about when they calculate overtime and double-time. They just take the base rate of pay, multiply it by one and a half for overtime or two for double time, and that’s it. Unfortunately, the calculation isn’t that simple. The regular rate of pay, which is different from the base rate of pay, actually includes additional income such as non-discretionary bonuses, shift differentials, which is like additional pay when you have an employee use an undesirable schedule or for a weekend or overnight work, piece rate compensation, such as payment per box of fruit picked, or even commissions. Employers need to add to have all of these types of income in addition to the employee’s base hourly rate before calculating both overtime, double time, sick pay, and meal and rest period premium payments. To make this even more complicated, the law requires one calculation for a flat sum bonus, such as $50 paid for weekend work, and another calculation for production bonuses, such as an employee who might earn 5% of all sales in a given month.

Talia: Let’s Let me give you a quick example. If you’re paying an employee a flat-sum bonus, here’s the example. Your employee earns $16 per hour and works 40 straight-time hours and four overtime hours on Saturday. The straight The overtime payment is simple. $16 times 40 hours equals $640. The overtime payment, $24 an hour times 4 hours equals $96. Now, the employee has paid the $50 bonus for working on Saturday. Now you need to calculate the overtime compensation due on the bonus. Now this is where the math comes in. You take $50 in bonus, you divide it by the 40 hours of straight time hours worked, and this gets you $1. 25, which is the per hour value of the bonus. Now you take that $1. 25, you multiply it by 1. 5 for the overtime, and you get $1 87. 5. This is the bonus overtime value per hour. Now you have to actually figure out how much of that goes to the overtime. You take the $1. 87. 5 times the 4 hours of overtime the employee worked, and you get $7. 50. This is the overtime due on the bonus. This is the part that most employers miss.

Talia: When you add all of that up, the total straight time pay, the total overtime pay, the $50 flat sum bonus, and that $7. 50 over time owed on the bonus, you get a total of $793. 50.

Ryan: Well, thank you, Talia. How about some good news now that we realize that a lot of us out there might be underpaying our employees based on the regular rate? Let’s discuss what doesn’t need to be included in the regular rate. There are at least three categories of items that can be excluded from the regular rate calculation because they’re not considered wages. The first exclusion is for payments that could be categorized as gifts or gratuities. This would include employer contributions to retirement life or other insurance benefits. Benefits. It also includes holiday bonuses or other payments given to employees that are considered rewards for service or rewards for loyalty, so long as the amounts paid are not directly measured by the employee’s hours worked or the employee’s production or efficiency. The second category of item that can be excluded from the regular rate includes items and payments that are made for periods where no work is performed. This is stuff like vacation pay, paid sick sick pay or similar payments. The third category is expense reimbursements, which are obviously not considered wages. Now, this shouldn’t be confused with per diem payments, which usually are required to be included in the regular rate of pay calculations.

In addition, the cost or the value of loggings or meals that the company provides to employees often must be included as well in the regular rate of pay under certain circumstances. It’s pretty detailed, so we won’t get into that today, but just be aware of that. It’s also important to remember that premium payments must be paid at the regular rate of pay, not the base hourly rate. Just a refresher, under California law, not exempt employees who are not providing compliant meal or rest breaks are entitled to an extra hour of pay under the labor code. This payment is called a premium. We discuss this premium in more detail in other episodes. But many employers pay these premiums out at the employer’s base hourly rate, and that’s a mistake because the California Supreme Court has clarified that premiums must actually be paid at the often higher regular rate of pay. That would be a violation just by getting that wrong. Sick leave must also be paid out the regular rate of pay and not the base hourly rate. Talia, why don’t you share with us some of the risks employers face for getting the regular rate wrong?

Talia: Absolutely, yeah. Unfortunately, regular rate of pay violations are low hanging fruit. An attorney need only request the employee’s payroll records, which the employers are obligated to provide, and they do some simple math to see if there are violations. If an employee’s pay stub shows an overtime rate that is exactly one and a half times the base rate of pay in the same pay period that the employee earned a bonus or other income like we discussed earlier, then that lawyer knows they have a slam dunk case. In the example that I gave earlier, if an employer neglected If you wanted to include that Saturday work bonus in the overtime calculation, that $7. 50 omission could cost the employer thousands of dollars. This is made up of significant penalties, $100 per employee per pay pay period and up to 30 days of pay at the employee’s full daily rate if the error is discovered after the employee quits or is terminated. The damages also include interest, potential liquidated damages, and payment of the employee’s attorney’s fees. This is a huge sum of money for missing a payment of just $7. 50. Employers, unfortunately, can also be subject to class action liability if they fail to use the regular rate of pay for all of their employees.

Talia: In this very scary turn, those damages can extend back four years from when an employee files a lawsuit.

Ryan: Thank you, Talia. We know this is a scary topic for some, and it’s pretty complicated. You can always reach out to one of our attorneys here at Weintraub if you have any specific questions about the regular rate or how to calculate production bonuses. With that, that’ll do it for today. We thank you all for joining us. You can continue to find California Employment News at our blog at www.thelelawblog.com and wherever you listen to your favorite podcasts. With that, we’ll see you next time. Thank you for joining us.

Talia: Thank you.