The U.S. Department of Labor recently revised its regulations governing the calculation of the “regular rate of pay.” That is the hourly rate used to calculate the overtime premium due hourly workers. The revised rules are effective January 15, 2020.

These amendments to federal Fair Labor Standards Act regulations are relevant to California employers and practitioners. California’s Labor Code requires overtime based on the “regular rate of pay,” but does not define the term. So, California courts and the state’s Division of Labor Standards Enforcement follow the federal regulations. For example, the Division has written in its Enforcement and Interpretations Manual, section 49.1.2: “California law adheres to the [regular rate] standards adopted by the U.S. Department of Labor to the extent that those standards are consistent with California law.”

Background

Unless “exempt,” employees covered by the Fair Labor Standards Act are due overtime premium pay when they work more than 40 hours per week. State and local laws may impose standards more generous to employees. 

In California, for example, employees earn overtime premiums after working eight hours in a day, even if they never work 40 hours that workweek. Another example: overtime premiums are due on the seventh day worked in a workweek.

Under federal law, the overtime premium is one and one-half times the employee’s “regular rate of pay” for the workweek in question. In California, overtime may be due at the “time and one-half” rate, or even at “double-time” – such as for work time in excess of 12 hours in a day, or over eight hours on the seventh day.

The Regular Rate

The regular rate is defined as the “total remuneration for employment (except statutory exclusions) in any workweek divided by the total number of hours actually worked … in that workweek for which such compensation was paid.”  When a worker earns only one hourly rate, or perhaps a single bonus or a night differential during the same workweek, the regular rate may be relatively easy to calculate.  However, the California Supreme Court complicated even simple regular rate calculations in Alvarado v. Dart Container Corp., by requiring certain “flat-sum” bonuses to be divided by only “straight-time” hours, as opposed to the “total hours” worked.

Regular rate calculations may involve numerous other complications. The regular rate for a given workweek must take into account the “statutory exclusions” mentioned above.  There may be ambiguities about whether compensation is really “remuneration for employment,” when the remuneration was earned, or over what period of time. 

Because the correct regular rate is essential to the proper calculation of overtime, it is important to compute it correctly.  Underpayment of overtime may give rise to a variety of penalties.  Overpayment naturally is costly as well.

Regulations and Revisions

To help employers calculate the correct regular rate, the U.S. Department of Labor promulgated regulations regarding what compensation should be included and excluded from the regular rate. These regulations principally are contained in 29 CFR §§ 778.108, 109, and 200-225.

The DOL intends the revisions taking effect in January 2020 to clarify some of the above rules, as well as to reflect new state laws and modern employer practices.  For example, the DOL modified 29 CFR § 778.218, which excludes from the regular rate certain payments for occasional time off.  The DOL clarified that this section’s exclusion from the regular rate covers payments for bereavement leave, paid family leave, time off for school activities, organ donation, and other types of time off not listed in the original regulation.

The DOL also modified 29 CFR § 779.219 to better address the modern realities of paid time off, not contemplated by the original version of the rule. The revised rule will allow more types of pay in lieu of holidays and other time off to be excluded from the regular rate.

A previous regulation addressed when reimbursement of certain business expenses would be included or excluded from the regular rate. The revised rule, 29 CFR  § 778.217, clarifies that an expense does not solely have to be for the employer’s benefit to qualify for exclusion (such as when the employee is reimbursed for lunch). The modified regulation also specifies certain expenses that are per se excludable.

To address the emergence of new state scheduling laws, the DOL reworked several sections, 29 CFR §§ 778.220-222, which pertain to “show up,” reporting time, call-in, and call-back pay.  Most of these penalty-type payments are excluded from the regular rate, unless they are “pre-arranged” incentives by the employer.

The DOL also attempted to clarify when certain kinds of “discretionary” bonuses are excluded from the regular rate calculation. The DOL attempted to clarify its rules so that employers better understand what makes a bonus “discretionary” or a gift and, therefore, excludable. 29 CFR § 778.212.  The DOL also clarified that certain referral bonuses may be awarded to employees who are not involved in recruiting without including the bonus in the regular rate, and certain sign-on, severance, and longevity bonuses may be excluded as well. 29 CFR § 778.211.

The revised regulations clarify existing rules covering a few additional topics, as well. These include the exclusion from the regular rate of certain types of “benefits,” and  clarification about when agreed-upon extra pay that is not required by law may be excluded from the regular rate calculation.

Employers should review the new rules with their employment counsel and payroll providers to ensure their payroll practices are consistent with the revised regulations. Now is also a good time to ensure that the regular rate and overtime are calculated properly in general, given the potential liabilities for underpayment.