Regular Rate of Pay in California: Overtime, Meal and Rest Break Premiums, and Employer Compliance

California employers must calculate overtime, meal, and rest break premiums using the regular rate of pay, including bonuses and incentives. Miscalculating regular rates can result in lawsuits, penalties, and compliance risks, making accurate payroll practices vital for businesses across the state.

By Douglas Wade, Attorney

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Table of Contents

1. Introduction

2. Ferra v. Loews Hollywood Hotel: A Synopsis

3. “Regular Rate” Update

4. Regular Rate Exclusions That Are “Statutory”

5. Bonuses: Discretionary versus Non-Discretionary

6. Bonuses for Hiring and Signing

7. Bonuses in the Flat Sum

8. Piece-Rate Workers: Time for Rest and Recuperation

9. Commissioned Workers

10. Employee Compensation at Various Rates

11. Salaried Non-Exempt Workers

12. Suggestions for Businesses

Introduction

Although the majority of California employers are accustomed to using the “regular rate” when calculating overtime compensation for non-exempt workers, recent legislative changes make it apparent that employers must now use the same regular rate computation when assessing premiums for failure to provide meal & rest breaks to their staff.

The California Supreme Court recently ruled in Ferra v. Loews Hollywood Hotel that employers must use the technical standard calculation, which includes incentive pay corresponding to the pay period, when determining meal, rest, and recovery time premiums. The court dismissed the idea that employers might reimburse meal & rest break premiums at the worker’s basic hourly rate.

Now, there are even more consequences for computing the regular rate incorrectly. Class action lawsuits and cases pursuant to the Private Attorneys General Act for inadequate payment of overtime earnings and rest, meal, and recovery time premium payments may be brought against employers who miscalculate the regular rate. Employers in California should therefore devote their resources and time to examining their pay processes and policies to make sure they are correctly calculating regular rates.

Ferra v. Loews Hollywood Hotel: A Synopsis

As most California companies are aware, Labor Code’s Section 226.7 mandates that employers offer an extra hour of pay at the worker’s “regular rate of pay” for every workday in which the worker is not given a lunch, rest, or recuperation period. This is referred to as a “premium” payment. During the pay period in which the break infraction happened, the company must provide this premium payment in addition to the other earnings that are owed.

Jessica Ferra was working as a waitress at the Loews Hollywood Hotel in Ferra. She received hourly pay in addition to a quarterly non-discretionary bonus that was related to the pay period during which there may have been meal-period breaches. However, Loews’ policy was to pay a single hour of premium compensation at the employee’s basic hourly rate to workers who did not receive a legal rest or meal break.

This was done without factoring it into the quarterly incentive payout for that pay period. Ferra brought a class-action complaint, claiming that rest and meal break premiums ought to have taken non-discretionary compensation into account. The employer was comprehending that the term “regular rate of pay” exclusively referred to the basic hourly rate of pay, excluding quarterly compensation.

However, for the objective of determining overtime, the California Supreme Court ruled that the term “usual rate of compensation” for the mandatory rest or lunch or recuperation premiums was equivalent to the word “regular rate of pay.” As a result, employers are now required to pay meal, rest, or recovery period premiums at the standard rate that is applied when calculating overtime. The Court even went so far as to rule that the ruling would be effective in the past.

“Regular Rate” Update

Whether or not overtime is due during the workweek in which the violation happens, employers need to use the regular rate of pay for overtime calculations. As a reminder, they must review the law and refer to the roadmap below for guidance on calculating the regular rate of pay. With very few exceptions, California sets a standard rate of pay in accordance with the Fair Labor Standards Act.

All “remuneration” for work (i.e., all earnings and pay, excluding statutory exclusions) in any given workweek is typically added together and divided by the overall number of hours completed by the worker during that workweek to determine the regular rate.

Employers shouldn’t underestimate the difficulties that come up when merging several incentive programs and compensation plans to determine the regular rate, even if it could appear straightforward at first. Furthermore, as mentioned below, California has special public policies that alter the computation only under certain conditions.

Regular Rate Exclusions That Are “Statutory”

The statutory exemptions to the ordinary rate computations that are utilized most often are listed below. This is by no means an exhaustive list. Statutory exclusions can be a legal quagmire, so before relying on any of them, you should speak with your California lawyer.

Gifts: When establishing an employee’s regular rate, gifts given occasionally that are not based on their productivity, efficiency, or number of hours worked are not taken into account.
Contributions Not for Hours Worked: Generally speaking, payments made to employees that do not represent payment for hours worked are excluded from the computation of a worker’s regular rate. Excluded are payments for any remaining vacation time, paid holidays, paid sick leave, paid time off for periods not worked, and compensated time off. Premium payments for meals and rest periods are also not included.
Reimbursements: Reimbursements for expenditures made by workers on behalf of the employer to serve the firm’s interests, like phone bills and credential exam fees, are typically excluded from the calculation of the regular rate of pay. However, there might be a reason to apply the prepared higher pay to the regular rate computation if workers get extra compensation that is designated expressly as compensation for regular expenses.
Some Benefits: Employer payments to certain benefit programs, such as health, life, retirement, or accident insurance, are not regarded as compensation when computing the regular rate, provided that the plan satisfies specified criteria.
Some Premium payouts: Overtime premiums that are paid for hours over the daily or weekly standards for overtime do not necessarily have to be incorporated into the employee’s normal rate. Premiums paid for the majority of differentials on dirty or dangerous labor must, nevertheless, be reflected in the standard rate.
Call-back pay and reporting: Payments made on rare and irregular occasions for not giving employees enough notice for coming to work or for not giving them more than fifty percent of their regular or planned workday are not included in the regular rate.
Predictability Pay: Some cities, such as Emeryville and San Francisco, mandate that businesses provide “predictability compensation” to workers who fail to give the required notice of an alteration in schedule. As long as they aren’t so frequent as to be “basically predetermined,” these sums are excludable.

Bonuses: Discretionary versus Non-Discretionary

Bonuses that are discretionary may not be included in the normal rate. Despite its apparent simplicity, the term “discretionary” has a very particular meaning under overtime law, and if it is not properly considered, it may result in an incorrect categorization and a large, insufficient reimbursement of overtime.

For a bonus to qualify as a discretionary incentive, the employer must have complete control over the amount and timing of the payment. Without any prior commitment or agreement, the reimbursement must be decided at or close to the conclusion of the bonus payment term.

Therefore, even though the bonus plan also states that the company may choose not to pay the incentive later for a variety of reasons, the business has forfeited its discretion if it declares in January that it plans to pay the incentive in June. Determining whether a bonus is discretionary vs non-discretionary for the objective of calculating the usual rate for overtime may also involve other factors.

To put it briefly, avoid the typical mistake of just designating the bonus as “discretionary” without first having legal counsel carefully consider it. Simply designating a payment as discretionary does not ensure that it is genuinely voluntary or sufficiently detached from the performance measures that underlie the bonus, which would otherwise necessitate incorporation in the regular rate. The discretionary categorization may give rise to intricate fact disputes.

Non-discretionary bonuses, in contrast, are intended to motivate staff members and can be given in a number of situations. Bonuses paid in accordance with a commitment, contract, or agreement are not regarded as discretionary. Bonuses to boost output, work quality, or attendance are a few examples. To know whether the incentive is properly classified as discretionary or non-discretionary, businesses need to evaluate their policies & procedures with legal advice.

Bonuses for Hiring and Signing

It’s possible that many firms are unsure if hiring or signing incentives belong to the regular rate of pay. Bonuses that are given out at the point of hire that aren’t dependent on a worker’s performance, hours worked, or duration of service are typically not included in the normal rate calculation.

The bonus is deemed non-discretionary and has to be added to the regular rate if any part of it is deferred or dependent on the employee’s performance or continuing employment. Regarding its effect on the standard rate or the achievement periods that serve in establishing the regular rate, the bonus’s labeling will not be decisive.

Employers must assess the value of attracting and maintaining skilled workers against the administrative strain of calculating all premium payments and the extra overtime owed at the end of the retention period when deciding whether to combine a signing bonus with a retention requirement.

Bonuses in the Flat Sum

The California Supreme Court’s ruling in Alvarado v. Dart Container Corp added even more complexities to bonus payments by requiring companies to pay compensation for flat-sum incentives using an alternative calculation that fails to count the bonus as being gained over every hour worked, including overtime hours. This resulted in an enormous spike in overtime. Bonuses categorized as flat-sum are ones that either don’t rise or have the ability to rise in proportion to the number of hours performed.

In Alvarado, the company’s written policy that awarded an attendance incentive to any worker who was supposed to perform a weekend shift but actually finished the entire shift was in question. However, the employee received the bonus irrespective of how many hours they worked that day. To determine overtime owed on a flat-sum bonus, the Court established a novel test that divides the bonus by the total number of non-overtime hours (in contrast to all hours in the standard regular rate computation).

The regular rate alone will be proportionately greater than if the bonus had been split by all hours worked (for example, a production bonus), as the regular rate is calculated by dividing the bonus solely by non-overtime hours. Overtime is compensated at 1.5 times the usual flat-sum bonus rate instead of 50% of it once the regular rate has been determined. Essentially, this overtime computation at the entire 1.5 times (instead of 0.5 times) the ordinary rate results in an additional amount compensated for the overtime since the bonus failed to compensate anything for the overtime hours worked.

Piece-Rate Workers: Time for Rest and Recuperation

As part of the overall number of hours worked, the time invested in rest and recuperation is considered “hours worked” and needs to be paid. This comprises workers who receive piece-rate compensation in line with California Labor Code 226.2. When estimating the regular rate, this pay must be included in all employment-related compensation.

Commissioned Workers

The extra overtime & meal-rest-recovery intervals premium payments due for the period of time when breaches occurred—also referred to as “true-up” payments—must be computed by employers who pay commissions to workers less frequently than during the standard pay period.

Commission payment frequency is governed by legislation in California. The commission payment is often required to be spread out throughout the workweeks in which it was earned. When an employee’s hours vary significantly from week to week or when it is not feasible or feasible to divide commissions between workweeks in a different way, the regular rate can be calculated by dividing the commission received by the total number of hours worked throughout the period over several workweeks during which the commission was earned.

Therefore, a supplementary premium payment for the week in which a breach of the meal-rest-recovery time occurred will be necessary for a rise in the standard hourly rate. Usually, the amount of overtime hours done during that workweek is multiplied by the hourly rate rise, which is then multiplied by half to determine the extra overtime owed. The higher hourly rate is multiplied by the total number of double-time hours worked during the workweek to determine any additional double time. As said, flat-sum bonuses will have a distinct overtime computation.

Practically speaking, when commissions are given out at different periods than regular earnings, payments will be made in stages. Employers must reimburse the meal-rest-recovery extra at the worker’s basic hourly rate till commissions can be computed and paid. This can be done at the employee’s base rate or at the regular rate known from other incentives or hourly payments obtained in addition to the base rate. Like bonuses, companies will have to give a “true-up” payment once incentives are calculated because of the higher regular rate.

To calculate the final regular rate of pay brought about by every source of compensation, businesses should add (or distribute) the commissions to the total amount of money received during the pay period and then divide that sum by the total number of hours worked during the relevant pay period. To determine the “true-up” payment that is due, the employer only needs to pay the higher regular rate or deduct the base rate (or known regular rate during that time) from the final regular rate. This is because the rest and meal premium was remitted at the employee’s base rate.

One thing to keep in mind is that the regular rate is likely to be much higher than the staff member’s base hourly rate if the majority of their pay is made up of commissions. Employers who had been paying premiums at the base rate for their employees would be wise to make sure they have adequate funds set aside for the higher premium payments.

Employee Compensation at Various Rates

In a workweek where an employee operates at more than two hourly wages, the regular rate during that week is the “blended” regular rate, which is the weighted mean of those rates.

Salaried Non-Exempt Workers

Overtime compensation at the usual rate of pay is still required for non-exempt employees who receive compensation on a salary basis. Instead of counting all hours worked, the normal rate of pay in this case is determined using a maximum of 40 hours a week. Instead of using the one-half premium utilized in the standard calculation, overtime is then computed by doubling the usual rate by one and a half.

Suggestions for Businesses

Employers should first make sure that the regular rate of compensation is computed accurately by reviewing the formulae they use to determine it. Bonuses should also be assessed by employers to ensure proper categorization. Lastly, companies want to assess how they now pay rest and meal period premiums.

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Regular Rate of Pay in California: Overtime, Meal and Rest Break Premiums, and Employer Compliance

Introduction

Ferra v. Loews Hollywood Hotel: A Synopsis

“Regular Rate” Update

Regular Rate Exclusions That Are “Statutory”

Bonuses: Discretionary versus Non-Discretionary

Bonuses for Hiring and Signing

Bonuses in the Flat Sum

Piece-Rate Workers: Time for Rest and Recuperation

Commissioned Workers

Employee Compensation at Various Rates

Salaried Non-Exempt Workers

Suggestions for Businesses

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