Determining an employee’s regular rate of pay

It is common knowledge throughout California workplaces that non-exempt employees are entitled to overtime if they work more than eight hours in a day or over forty hours in a week, and that employees earn “time and a half” or “double time” for overtime hours worked. However, some employers run into problems in determining the rate of pay which is ultimately multiplied by 1.5 or doubled. The rule in California is that the regular rate of pay must include all remuneration from the employer.

A common example is the restaurant employee. Suppose a restaurant employee receives a free meal during her shift. If her regular rate of pay is $15 per hour, then she would be paid $120 for an eight hour shift. However, her regular rate of pay must include the cost of the free meal (the lesser of the actual cost to the employer or the fair market value). If each meal costs the employer $10, then the employee’s total daily compensation is actually $130, or $16.25 per hour. This employee’s overtime rate would be $24.38, not the $22.50 that might be expected for a $15 per hour employee.

In this example, failure to properly calculate the employee’s regular rate of pay would result in the employee being short-changed $1.88 for each overtime hour worked. Such a shortfall could result in liability for unpaid wages, penalties under Labor Code section 203, interest and attorney’s fees.

These shortfalls are common in situations dealing with bonuses, incentives, mandatory gratuities at restaurants, free or subsidized lodging, or free trips or prizes for hitting sales targets. If any of these incentives are offered, or if anything of value is offered to an hourly employee beyond base wages, be sure to include that value when calculating the employee’s regular rate of pay.