By Stacey Sommerhauser, SPHR, PHRca, SHRM-SCP
We all know if a non-exempt employee works in California for more than eight hours in any one workday or more than 40 hours in a workweek, then overtime wages are due at the rate of one and one-half the employee’s regular rate of pay. But how is the overtime calculated when a non-exempt employee earns two different rates of pay in a workday?
The CA Department of Labor Standards and Enforcement (DLSE) has long allowed CA employers to use the “weighted average method” to calculate overtime when two or more rates of pay are earned during a workweek. As we know, this calculation can be complicated. To calculate the weighted average, an employer must divide total earnings for the workweek, including overtime earnings, by the total hours worked during the workweek, including overtime hours. This complicated calculation increases the likelihood for error on the side of the employer and it may be challenging for employees to understand how the overtime is being paid.
Under the federal Fair Labor Standards Act (FLSA), there is another approved method, the “rate-in-effect.” If you’ve had employees in California for any period of time, you know we generally follow California law versus federal law. However, a recent court decision (Levenoff v. Dragas (Buffalo Wild Wings)) may add a ray of sunshine to your day. In this court case, the California Court of Appeal decided paying overtime based on the rate that was in effect when the overtime was actually worked is allowable. The courts found the rate-in-effect method was “fair and neutral” because in this specific case it resulted in the defendants, as a whole, earning more. Additionally, the rate-in-effect method is arguably more transparent, as an employee should be able to easily calculate wages owed when working overtime, as they are based on the hourly rate in effect when the overtime hours were actually worked.
Let’s look at a couple examples of how overtime is calculated using each method. First let’s calculate the overtime using the rate-in-effect method. An employee earns $20.00 per hour for Job A and $30.00 per hour for Job B and he works the following hours during one workweek:
- Monday – 8 hours at Job A ($20/hour) = $160
- Tuesday – 8 hours at Job B ($30/hour) = $240
- Wednesday – 8 hours at Job B ($30/hour) = $240
- Thursday – 8 hours at Job A ($20/hour) = $160
- Friday – 10 hours (8 at Job A ($20/hour) and 2 at Job B ($30/hour)) = TBD*
Here is the calculation: the first 8 hours on Friday performing Job A are regular non-overtime hours so those 8 hours paid at $20/hour would total $160. The last two hours are overtime hours for Job B where the employee earns $30/hour, but are paid at time and one-half times the hourly rate or $45/hour which equates to $90 for the two hours of overtime. (*Total for the day is $250)
Weekly total: $1,050.00
Now, let’s calculate the overtime with that same data, but this time we will use the weighted average method.
- Monday – 8 hours at Job A ($20/hour) = $160
- Tuesday – 8 hours at Job B ($30/hour) = $240
- Wednesday – 8 hours at Job B ($30/hour) = $240
- Thursday – 8 hours at Job A ($20/hour) = $160
- Friday – 10 hours (8 at Job A ($20/hour) and 2 at Job B ($30/hour)) = $220 (not including the overtime)
Total Pay for all hours not including overtime = $1,020.00
To determine the overtime using the weighted average rate divide the total pay by all hours worked or $1,020 divided by 42 hours = $24.29. This weighted average rate is used to determine overtime. Overtime is due at one-half the weighted average rate or $24.29 x .5 x 2 hours = $24.29.
Weekly total = $1,020 + $24.29 = $1,044.29
These examples show the simplicity of using the rate-in-effect method to calculate the overtime. Because the employee worked in Job B ($30/hour) when the overtime was worked, the employee received $5.71 more than in the weighted average method. However, had the employee worked in Job A ($20/hour) when the overtime was worked, the overtime would have been paid at one and one-half times Job A’s rate or $30/per hour.
If you decide to use the rate-in-effect method for paying overtime to employees earning multiple rates of pay, you must notify the employees in advance, before performing any work, of the method which will be used for calculating pay for overtime hours. By being informed of this method of compensation in advance, all employees are thereby agreeing to the terms. Of course, the rates of pay should be disclosed in a separate writing on the Notice to Employee (found here) and in the overtime policy in your handbook.
As always, this is not to be considered legal advice and we recommend you contact your HR Consultant or employment counsel before making any changes to your current practices.