(This is part one of a two-part article.  Part two will be published next month.)

Even employers with the best intentions find it difficult to understand California’s ever-changing wage and hour laws. One common pitfall is paying overtime (and other forms of compensation) at the incorrect rate. This simple mistake can lead to a host of potential problems like wage underpayments, late payments, inaccurate wage statements, and more.

What is the “Regular Rate of Pay”?

Overtime must be paid as a multiplier of the “regular rate of pay.” To calculate the regular rate of pay (with some limited exceptions), an employer must add all the non-discretionary compensation in the workweek, not including the overtime premium (i.e., the “.5” portion of overtime paid at time and a half), and divide that total by the total hours worked.

If an employee’s only form of compensation is a single hourly rate, called the “base rate,” calculating the regular rate of pay is easy—the base rate is the regular rate of pay. However, many employers pay other forms of compensation such as bonuses, shift differentials, or commissions.  These amounts factor into the “regular rate of pay,” increasing the rate at which the employee earns overtime and other compensation.

Calculating the Regular Rate by “Workweek” and “Workday”

The regular rate of pay is calculated by “workweek” and “workday.” Although these terms sound straightforward enough, they have legal meaning. A workday is an established 24-hour period, and a workweek consists of seven established consecutive 24-hour workdays. An employer may define the workweek and workday, as long as it does not do so in a manner designed to avoid paying overtime. If an employer does not establish the workday and workweek, an employee may elect the definitions most beneficial to them (i.e., so they earn the most overtime).

A common mistake is to calculate overtime based on the shift length, instead of a defined workday and workweek. For example, if an employer defines the workday from 12:00 a.m. to 11:59 p.m., an employee who begins their shift at 8:00 p.m. and finishes the next calendar day at 7:00 a.m. may not earn any overtime at all on that shift, even though it is longer than eight hours, because the single shift is performed over two different workdays (8:00 p.m. to 11:59 p.m., and 12:00 a.m. to 7:00 a.m.).  But, if the employee reports back to work at 8:00 p.m. that evening, they will earn daily overtime once they work over eight hours that workday, counting the hours they worked that morning.

When to Use the Regular Rate of Pay

Employers must use the regular rate of pay not only to calculate overtime, , but also for other forms of compensation including sick leave, reporting time pay, split shift pay, call back pay, and meal and rest period premiums. Also, some local ordinances may require making certain additional payments at the regular rate of pay.

Calculating Overtime with Multiple Pay Rates

If an employee earns pay at different pay rates in the workweek, many employers mistakenly calculate overtime based on the shift rate. For example, if an employer pays a higher rate for work performed in the evening, it will pay a higher overtime rate when an employee works overtime on an evening shift, and a lower overtime rate if an employee works overtime during a daytime shift.

In fact, when an employee earns multiple rates of pay, the regular rate of pay for overtime purposes is the “weighted average” of those rates. The weighted average takes into account the total number of hours the employee worked at each rate in the workweek. Regardless of when the employee works overtime during the workweek, they are paid overtime based on this blended rate.       

For example, if an employee worked 20 hours in one workweek at $20.00 per hour, and 20 hours at $30.00 per hour, their weighted average is $25.00 per hour.  If the employee works one hour of overtime during that workweek, their overtime rate is $37.50 (i.e., $25.00 x 1.5), no matter when they work that hour.