Posts

Overtime Rate for Salaried Nonexempt Employees

How to Calculate the Overtime Rate

Almost 20 years ago the California Legislature adopted Labor Code section 515(d). Section 515(d) instructs how to compute the overtime rate of pay for salaried non-exempt employees:

For the purpose of computing the overtime rate of compensation required to be paid to a nonexempt full-time salaried employee, the employee’s regular hourly rate shall be 1/40th of the employee’s weekly salary

Paying a salary does not necessarily relieve an employer of its overtime obligations. If an employee is not “exempt” from the overtime laws, the employer must still pay overtime. But, how do you compute the overtime rate of compensation for salaried nonexempt employees?

Overtime Rate Calculation: Federal versus State

Under federal law, employers divide the weekly salary by the actual hours worked. This provides the regular hourly rate, and the basis of the overtime rate under the FLSA. California, of course, has to be different.

In 1985, Skyline Homes, Inc. v. Department of Industrial Relations (1985) 165 Cal.App.3d 239, followed the DLSE rule that the regular rate of pay in California is calculated by dividing the weekly salary by 40. This usually results in a higher hourly rate. It presumes the salary only covers the “regular” hours worked (i.e., the first 8 in a day and the first 40 in a week).

In 1999, Labor Code 515(d) codified the difference between federal and state law. The overtime rate for salaried nonexempt employees is calculated by dividing the weekly salary by 40. But, what about an employee who works less than 40 hours a week? Do you use the actual hours worked or the 1/40th rule in Labor Code 515(d)?

The DLSE manual (oftentimes referred to as an “underground regulation”) says you use the actual hours worked or 40, whichever is lower. However, this contradicts the plain language of Labor Code 515(d). Until recently, there was no clear guidance either way.

Supreme Court Decides Overtime Rate Calculation

On March 5, 2018, the California Supreme Court decided Alvarado v. Dart Container Corporation of California, directly addressing the issue:

Moreover, after Skyline Homes was decided, its formula for calculating the regular rate of pay in the case of a fluctuating workweek with a fixed weekly salary was codified as Labor Code section 515, subdivision (d). That subdivision provides: “(1) For the purpose of computing the overtime rate of compensation required to be paid to a nonexempt full-time salaried employee, the employee’s regular hourly rate shall be 1/40th of the employee’s weekly salary.

*Page 24 of slip opinion (emphasis in original).

Skyline Homes is, however, ambiguous in one respect. It is not clear from the opinion whether the divisor for purposes of calculating the per-hour value of a weekly salary should be the number of nonovertime hours actually worked by the employee in the workweek in question, even if that number is less than 40, or whether it should be 40 (i.e., the number of nonovertime hours that exist in a workweek). In codifying the holding of Skyline Homes, the Legislature adopted the latter rule. (Lab. Code, § 515, subd. (d)(1) [“the employee’s regular hourly rate shall be 1/40th of the employee’s weekly salary”].)

*Page 24-25 of slip opinion (emphasis in original).

As noted, the Legislature, in codifying the holding of Skyline Homes, adopted 40 as the divisor for all cases (Lab. Code, § 515, subd. (d)(1))

*Page 25 of slip opinion

Overtime Rate for Flat Sum Bonus

Should this prove too simple, the court set out a different rule for employees receiving a “flat sum bonus.” Alvarado received an “attendance bonus” — a flat amount paid to employees who work weekends. The attendance bonus was earned regardless of whether the employee worked overtime. This led the court to assume “the bonus is properly treated as if it were fully earned by only the nonovertime hours in the pay period.” *Page 19-20 of slip opinion.

The court then concluded: “therefore only nonovertime hours should be considered when calculating the bonus’s per-hour value.” *Page 20 of slip opinion.

I don’t follow the court’s logic because I don’t agree that the bonus is properly treated as if it were fully earned by only the nonovertime hours. I agree Labor Code 515(d) is not applicable to bonuses because it only applies to a “salary.” It seems more logical, to divide the bonus by all hours worked; not just the regular hours worked. The attendance bonus is earned by working on the weekend, whether the employee works overtime or not. That is how other bonuses and incentive compensation is typically factored into the overtime rate of pay. The court’s logic on this point is a bit shaky.

Unfortunately, the Supreme Court did not ask my opinion before issuing its decision, so we are stuck with their holding.

If you are an employer who pays a flat sum bonus, you will need to review your policies and possibly recalculate any overtime payments over the last 4 years.

If you have questions about wage and hour laws in California, feel free to contact me at your convenience. I’ve been representing employees and employers in wage and hour matters for more than 20 years. I had my first overtime trial before I graduated law school. I routinely represent individuals, companies and families in Labor Commissioner hearings and audits. I’d be happy to discuss your minimum wage, overtime or other compensation questions.

Original article by Robert E. Nuddleman of Nuddleman Law Firm, P.C.

Feel free to suggest topics for the blog. We are happy to consider topics pertaining to general points of Labor and Employment Law. We cannot answer questions about specific situations or provide legal advice over the Internet. If you desire legal advice, you should contact an attorney.

Using this blog does not create an attorney-client relationship between you and Nuddleman Law Firm, P.C. Using the Internet or this blog to communicate with the firm does not establish an attorney-client relationship. Do not post confidential or time-sensitive information in this blog. The Nuddleman Law Firm, P.C. cannot guarantee the confidentiality of anything posted to this blog.

The Nuddleman Law Firm, P.C. represents employees and businesses throughout Silicon Valley and the greater San Francisco Bay Area including Pleasanton, Oakland, San Ramon, Hayward, Palo Alto, Menlo Park, Mountain View, Los Altos, San Jose, the South Bay Area, Campbell, Los Gatos, Cupertino, Morgan Hill, Gilroy, Sunnyvale, Santa Cruz, Saratoga, and Alameda, San Mateo, Santa Clara, San Benito, Mendocino, and Calaveras counties.

 

Salary Requirement for Federal and California Overtime

UPDATE ON THE UPDATE: The Department of Labor filed an appeal on the injunction. The notice of appeal aims to lift a temporary injunction against overtime changes that were scheduled to take effect December 1. The appeal was filed in the U.S. Court of Appeals for the Fifth Circuit in New Orleans. Forbes wrote a decent article about the appeal.

UPDATE 11/22/16: A Federal Judge in Texas issued an injunction blocking the new salary requirement from going into effect. This means the new salary requirement will not go into effect on December 1st. We’ll have to wait and see if the Department of Labor intends on fighting the injunction. With the new administration taking over in January, it is unclear how the DoL will proceed.

I’m leaving the rest of the article intact because it still provides useful information about the difference between the federal and the state salary requirement and duties test for exempt employees, and the outcome of the litigation is still anyone’s guess.

Several clients ask the following question (or very similar questions) about the new federal overtime salary requirement:

I have a quick question. It looks like there is a change coming on December 1, 2016 regarding the minimum salary requirement for exempt employees. We currently have our office manager set up with a $46,000.00 annual salary. I think this may fall under the new federal minimum salary requirement. Can you confirm this and also tell me if there is a different amount for California?

Because this issue confuses a lot of employers and employees, I thought I’d share my typical response.

Federal Overtime Salary Requirement

Federal laws requires overtime compensation when a non-exempt employee works more than 40 hours in a week.  Effective December 1, 2016, in order to qualify as an exempt employee under the federal overtime laws,  the employee must receive a guaranteed salary of $913.00 per week or $47,476 per year. The employee’s primary duty must be to perform exempt duties as defined by the FLSA.

The exempt employee must regularly and customarily exercise discretion and independent judgment regarding matters of consequence. Many office managers qualify under the administrative exemption. Additionally, if the office manager supervises 2 or more people and can hire and fire employees, the office manager may also qualify under the executive exemption.  I’m going to assume for the moment that the office manager is primarily engaged in performing exempt duties. Many people misapply the exemption, thinking that because the “office manager” can decide which vendors to use that means the exemption applies. In order to ensure she remains exempt, you will need to give her a raise effective December 1st.

California Overtime Salary Requirement

California has a slightly lower minimum salary requirement. To qualify as an exempt employee under California laws, the employee must receive a guaranteed salary equal to two times the state minimum wage (currently $10.00 per hour). That comes out to $41,600 per year (2 x minimum wage x 40 hours per week x 52 weeks per year). The minimum wage will increase over the next couple of years according to the following schedule:

Rate (Jan. 1) 26 Employees or More 25 Employees or Less
2017 $10.50 $10.00
2018 $11.00 $10.50
2019 $12.00 $11.00
2020 $13.00 $12.00
2021 $14.00 $13.00
2022 $15.00 $14.00
2023 $15.00 $15.00
2024 Indexed* Indexed*

* Rate adjusted to changes in Consumer Price Index (if any) to a cap of 3.5 percent each year. (Source)

As the minimum wage increases, so does California’s minimum salary requirement. By 2019, barring any changes in the law, employers with 25 or more employees must employees more than the federal minimum wage. Employers with less than 25 employees can get away with paying the federal minimum wage until 2020. As I mentioned, this assumes no further changes to California or Federal law. With the recent election, it’s anyone’s guess as to what the future holds.

Required Duties

Other major differences exist between state and federal law overtime exemptions. To qualify as exempt under California law, the employee must be “primarily engaged in” exempt duties. That sounds similar to the federal “primary duty,” but differs significantly. “Primarily engaged in” exempt duties under California law means the employee spends more than 50% of her time performing exempt duties. An employee’s “primary duty” under federal law means the employee can perform other, non-exempt duties, so long as the primary purpose of the position is to perform exempt duties.

Take the classic fast food manager example. Her primary duty is to oversee and run the restaurant. Because the restaurant is understaffed, the manager spends most of her time running the cash register and flipping burgers. The manager might meet the federal overtime exemption because her primary duty is to oversee the restaurant’s operations. The manager is not exempt under state law because she is not primarily engaged in performing exempt duties.

I hope this helps.  Feel free to give me a call if you have any questions.

Original article by Robert E. Nuddleman of Nuddleman Law Firm, P.C.

Feel free to suggest topics for the blog. We are happy to consider topics pertaining to general points of Labor and Employment Law. We cannot answer questions about specific situations or provide legal advice over the Internet. If you desire legal advice, you should contact an attorney.

Your use of this blog does not create an attorney-client relationship between you and Nuddleman Law Firm, P.C. The use of the Internet or this blog for communication with the firm or any individual member of the firm does not establish an attorney-client relationship. Do not post confidential or time-sensitive information in this blog. The Nuddleman Law Firm, P.C. cannot guarantee the confidentiality of anything posted to this blog.

The Nuddleman Law Firm, P.C. represents employees and businesses throughout Silicon Valley and the greater San Francisco Bay Area including Pleasanton, Oakland, San Ramon, Hayward, Palo Alto, Menlo Park, Mountain View, Los Altos, San Jose, the South Bay Area, Campbell, Los Gatos, Cupertino, Morgan Hill, Gilroy, Sunnyvale, Santa Cruz, Saratoga, and Alameda, San Mateo, Santa Clara, San Benito, Mendocino, and Calaveras counties.