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.
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