If you work a lot of overtime, you may be curious about how your overtime rate is calculated. Under both the federal Fair Labor Standards Act and California law, “nonexempt” employees are entitled to an overtime premium of 1-1/2 times their regular rate of pay whenever they work more than 40 hours in a given workweek. In California, most workers are also entitled to the overtime premium when they work more than 8 hours in a single day.
Under both California and federal law, the overtime premium rate depends on an accurate calculation of the employee’s regular rate of pay. That rate includes all the pay the employee is entitled to for the period being calculated including, for example, non-discretionary bonuses and incentives.
In other words, if you earned a bonus based on your performance or got paid a higher rate for working certain shifts, the bonus and shift differential should be included in your regular rate of pay. Your regular rate isn’t just your last paycheck divided by 40 hours, but must include any compensation to which you are entitled.
Excessive litigation pushes Labor Department toward new rule
Questions about the right way to calculate an employee’s regular rate of pay have resulted in a great deal of litigation in recent years.
One area of dispute is the proper determination of whether particular bonuses are discretionary (entirely up to the employer) or non-discretionary (typically based on performance, timeliness or other metrics). Only non-discretionary bonuses are included in the employee’s regular rate of pay because they are guaranteed compensation as long as the employee meets the stated criteria for the bonus.
Additional disputes have arisen when determining whether to include types of compensation that are relatively novel, such as:
- Irrevocable employee benefits
- Employee discounts and employer-sponsored gym memberships
- Tuition reimbursement
- Employer-sponsored or discounted transit or ride-share fares
- Compensation when no work is performed (e.g. vacation and holiday pay)
- Extra compensation paid as a result of a private agreement or collective bargaining agreement
- Income from options or grants
As a result of this litigation, the Department of Labor has announced that it will be issuing a new rule on how an employee’s regular rate of pay should be determined. It is expected to address whether benefits and non-traditional compensation are to be included in the calculation. If they are, the rule will likely also address how such compensation is to be valued for the purpose of the calculation.
The Labor Department announced its intention to update the rule in its fall regulatory agenda. The proposed rule was expected in early December but it has not yet been released.