In California, the “regular rate of pay” is used to calculate overtime pay, paid sick leave under the Healthy Workplaces, Healthy Families Act, meal and rest period premiums, split shift premiums, and reporting time pay.
Employers often assume the regular rate of pay is simply the employee’s base hourly rate. However, if an employee is paid multiple rates for different work, or receives other forms of compensation, their “regular rate of pay” will be more than the base rate.
Employers who ignore this distinction risk costly wage and hour claims, PAGA actions, and Labor Commissioner audits.
What Is the Regular Rate of Pay?
The regular rate of pay is the true hourly rate an employee earns, factoring in most types of compensation—not just their base wage. Employers must calculate this rate accurately any time pay employees more than a base hourly rate. This concept is particularly important in California, which imposes stricter requirements than federal law in some situations.
To calculate the regular rate of pay, all non-discretionary compensation must be included, such as hourly wages, non-discretionary bonuses (e.g., attendance, performance, certain hiring bonuses, etc.), commissions, piece-rate earnings, shift differentials, and controlled on-call or standby pay.
Other forms of compensation are excluded from the calculation, such as discretionary bonuses (e.g., “on the spot” bonuses not tied to performance), reimbursements for expenses, vacation or holiday pay, gifts or thank-you payments, and payments for time not worked, such as jury duty, bereavement, etc.
How to Calculate the Regular Rate
To calculate the regular rate of pay, divide the total non-overtime compensation earned in the workweek by the total hours worked in the workweek. For example, assume an employee earns hourly wages of $800 and an attendance bonus of $100 and works 40 hours in the workweek. The regular rate of pay is ($800 + $100) ÷ 40 = $22.50/hour.
There is an important exception to this calculation. California has a unique rule when it comes to flat sum bonuses—such as a $50 bonus for perfect attendance or a $100 safety incentive—that are not tied to hours worked or production. Under the California Supreme Court’s decision in Alvarado v. Dart Container Corp., when a flat sum bonus is paid in a workweek during which an employee works overtime, the employer must divide the bonus amount only by the employee’s regular (non-overtime) hours worked, and not the total hours (including OT).
For example, assume an employee earns $20 per hour, works 45 hours in the workweek (40 regular and five overtime), and receives a flat sum bonus of $50.00 for working Saturday morning. First calculate the bonus per hour ($50.00 bonus ÷ 40 regular hours = $1.25/hour). Next, add bonus rate to the hourly base rate to calculate the regular rate of pay ($20.00 + $1.25 = $21.25). Then calculate the overtime premium ($1.25 × 0.5 × 5 OT hours = $3.13). So, the employee’s pay for the week is $800.00 (base hourly rate) + $150.00 (overtime) + $50.00 (bonus) + $3.13 (bonus overtime premium) = $1,003.13.
Paid Sick Leave and the Regular Rate
Under California’s Healthy Workplaces, Healthy Families Act, non-exempt employees must be paid for sick leave at either the regular rate of pay for the workweek in which sick leave is taken, or a 90-day lookback average of all compensation (excluding overtime). So, if an employee earns commissions, bonuses, or other incentive pay, the sick leave rate must reflect those earnings.
Common Employer Mistakes
Common employer mistakes in this area include paying overtime or sick leave based on the base hourly rate only; misclassifying non-discretionary bonuses as discretionary (i.e., a bonus is not discretionary because the amount is set; the key is whether the employee can expect a bonus if they satisfy certain requirements); failing to recalculate the regular rate when paying retroactive bonuses (i.e., bonuses earned over a period of time greater than the current workweek, such as quarterly production incentives); and relying blindly on payroll systems to make the correct calculations.
Best Practices
Employers can reduce their potential liability related to regular rate of pay issues by taking a few important steps. First, audit payroll practices, and confirm bonus structures are clearly defined and categorized correctly. In addition, Human Resources and payroll teams must receive training on California-specific rules. Although California law follows the federal Fair Labor Standards Act in many wage-hour areas, there are significant differences between them. Employers also must exercise care when hiring outside payroll vendors because many of them do not understand California’s complex regular rate calculations.