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Another Important Overtime Decision

by Jennifer Shaw | | July 23, 2021

Gulp.  I went on vacation and missed an important wage-hour decision.  Here’s what you need to know…

In Levanoff v. Dragas, the California Court of Appeal surprised many of us and upheld an employer’s calculation of overtime due to non-exempt employees using the “rate in effect” method.  Why does that matter?

Some employers pay non-exempt employees more than one hourly rate.  Maybe employees receive a higher rate on the weekend, or a lower rate for travel.  No problem there.  The issue is how to calculate the “regular rate of pay” to determine the overtime due.

The California Division of Labor Standards Enforcement wants employers to use the “weighted average method.” In its “Enforcement Policies and Interpretations Manual,” the DLSE writes:

49.2.5 Weighted Average Method. Where two rates of pay are paid during a workweek, the California method for determining the regular rate of pay for calculating overtime in that workweek mirrors the federal method, based upon the weighted average of all hourly rates paid. (See 29 CFR § 778.115 ) Initially, therefore, it must be predicated upon the finding that there are established hourly rates being paid. The rate will be established by adding all hours worked in the week and dividing that number into the total compensation for the week. This is consistent with the provisions of Skyline v. DIR (1985) 165 Cal.App.3d 239, since the hourly rates have already been established and what needs to be established now is the weighted average of those rates for purposes of over time payment.

However, the federal Fair Labor Standards Act provides another method to determine the regular rate of pay when employees receive multiple rates of pay for performing different work. Under the “rate in effect” method, employers may pay employees not less than 1.5 times the applicable hourly rate for each type of work they perform. In other words, the regular rate will depend on what rate was “in effect” when the employee worked THE overtime.  (Keep in mind, there is no daily overtime rule under the FLSA. Only hours worked over 40 in a workweek count.) The “rate in effect” method only applies if, among other things, the employee understands in advance that overtime will be calculated in this manner.

Why would an employer want to use the “rate in effect” method? Because this method can, but will not always, result in less overtime due.

So. Back to the new case. Buffalo Wild Wings used the “rate in effect” method to determine the overtime it owed to California employees.  Employees sued under the California Private Attorneys General Act and other statutes, arguing that this method is not lawful in California.

The Court of Appeal concluded that the DLSE’s adoption of the “weighted average” method is not determinative, and nothing in California law requires employers to use only that method to calculate overtime rates.  Sounds good so far, right?  But, wait.  Employees actually received more overtime using the “rate in effect” method than they would have under the “weighted average.” That fact clearly drove the Court’s ruling.

All court decisions are limited to their facts. And, if the Buffalo Wild Wings employees had received less overtime using the “rate in effect,” the Court very likely would have reached a different result.

This decision is a good reminder that the DLSE’s opinions are not binding. Also, unless and until the California Supreme Court approves of the “rate in effect” method, employers should tread carefully.

The case is Levanoff v. Dragas, Calif. Ct. App. Nos. G058480, G058709 (June 25, 2021).  Available here.

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