As explained in our prior article of November 24, 2015 most employers are aware that their “non-exempt” employees must be paid no less than the minimum wage prescribed by federal and/or state wage and hours laws. These employers also know that federal and state laws require an employer to pay non-exempt employees 1 ½ times (or sometimes double) their regular hourly rate for all overtime – whether that overtime is measured by the day (more than eight hours) and/or by the week (more than forty hours).
In that prior article, we discussed the different types of bonuses employers provide their employees, and under what circumstances bonuses must be considered compensation subject to the wage and yours laws, including the rules pertaining to overtime pay. In this article, our employment law attorneys focus on the methods for calculating overtime under federal and California law when an employee is paid a salary.
Non-Exempt Employees and Overtime Laws
A “salary” is defined as a “fixed compensation paid regularly (as by the year, quarter, month or week) for services.” California Teachers Assn. v. Governing Bd. of Helmer Unified School Dist. (2002) 95 Cal. App. 4th 183, 194. Thus, for instance, when a non-exempt employee is paid $3,000 a month, or $600 a week, no matter how many or few hours he works, he receives a salary.
Under federal law, “overtime” is defined as any work in excess of 40 hours a week. Therefore, an employer could require his non-exempt employees to work ten hour days, four days a week, without violating the FLSA. However, employers in California are also subject to the California Labor Code and the Industrial Wage Orders promulgated by the California Labor Commissioner. Under California law, overtime is defined as any work exceeding 8 hours a day or 40 hours a week. Consequently, under the ten hours a day for four days a week scenario described above, an employer would not be required to pay his employees overtime under the FLSA, but would be obligated to pay them for 8 hours of overtime under California law (2 hours a day in excess of 8 multiplied by 4 days = 8 hours).
Calculating Overtime for Non-Exempt Salaried Workers: Federal versus California Law
The California wage and hours laws are harsher on California employers than is federal law, not only with respect to the determination of what constitutes overtime, but also with respect to the calculation of overtime pay. Under both federal and California law, a non-exempt employee’s overtime pay is based on his “regular rate of pay.” If an employee is paid by the hour, determining his “regular rate of pay” is relatively easy, unless the employee has received bonuses or gifts. See FN1, below. If he earns $10 an hour, $10 an hour is his regular rate of pay, and he is entitled to 1½ times $10 (i.e., $15) for all hours worked over 8 hours a day, and two times $10 (i.e., $20) for all hours worked over 12 hours a day.
The determination of an employee’s “regular rate of pay” is more complicated if the employee receives a salary, because the salary is not based on hours worked. Consequently, under both federal and California law, the salary must be converted to an hourly rate.
Let’s consider this example: An employee earns $600 a week and in a particular week, he works 52 hours. Under federal law, the 52 hours is divided into $600 to arrive at a “regular rate of pay” of $11.54 per hour. Let’s say that the 52 hours is comprised of four 10-hour days and one 12-hour day, such that all 12 hours above 40 are payable at1 ½ times the employee’s regular rate. Thus, the employee is entitled to $17.31 an hour ($11.54 x 1½ = $17.31) for all 12 overtime hours (i.e., $207.72). Consequently, under federal law, the employee is entitled to $807.72 ($600.00 in salary + $207.72 overtime = $807.72) for that week’s work.
Under California law, the same methodology is used to determine the amount of overtime to which the employee is entitled, with one exception: The weekly salary is divided by 40 (the hours in a “regular” work week) and not by the total number of hours the employee actually worked. See Labor Code Section 515(d)(2), which provides that, “Payment of a fixed salary to a non-exempt employee shall be deemed to provide compensation only for the employee’s regular non-overtime hours, notwithstanding any private agreement to the contrary”; Telles v. Su Juan Li (N. D. Cal. 2013) 2013 U.S. Dist. LEXIS 132932 *33.
Thus, $600 would be divided by 40 to arrive at the employee’s regular rate of pay – i.e., $15 per hour. The $15 per hour rate is then multiplied by 1½ to arrive at the overtime rate of $22.50 per hour. That overtime rate is then multiplied by 12 overtime hours to arrive at the overtime compensation of $270.00 to which the employee is entitled under California law. The $270 is then added to the salary of $600 to arrive at the total compensation of $870 payable to the employee for that week’s work.
The calculation is somewhat different if the employee’s salary is based on a time period other than a week. For instance, if the employee receives a monthly salary, the hourly wage rate is determined by dividing the monthly compensation by the number of hours worked in the month (federal law) or by the number of “regular hours” in the month (California law).
As an example, if an employee’s salary is $3,000 a month and he works 200 hours in the month, his regular rate of pay under federal law would be $15 per hour ($3,000 divided by 200 = $15). That rate would be multiplied by 1½ or 2 for all hours over 40 in a week to arrive at the employee’s overtime pay for that week. This would be done for all weeks in the month. Since there are typically more than four weeks in a month, the days “left over” after calculation of each of the four weeks in the month would typically not generate overtime under federal law, because, as noted above, federal law measures overtime by the week and not by the day.
Assume the same monthly salary scenario, but now under more stringent California law. First, the $3,000 monthly salary would be divided by the “regular hours” in the month. The “regular hours” under California law are non-overtime hours. Since overtime hours under California law are measured by both the day and the week, 40 hours would be attributed to the first four weeks in the month (i.e., 40 hours x 4 weeks = 160 hours). Then, for instance, if two work days in the month remained, the “regular hours” in those two days (8 hours x 2 days = 16 hours) would be added to 160 for a total number of “regular hours” in the month of 176. These hours would then be divided into $3,000 to arrive at a regular hourly rate of $17.05. The overtime multiplier, typically 1½, or 2 with respect to any hours in excess of 12 in any day, would then be applied to all overtime hours the employee worked. Thus, the employee would be entitled to $25.56 per overtime hour up to 12 hours in a day, and $34.10 for any overtime hours in excess of 12 in any day.
Based on the above, an employer should consider avoiding paying a salary to any non-exempt employee, unless the employer is certain the employee will not be working overtime. Typically, an employee’s main interest is in the total dollar amount he will earn, not whether it is characterized as a salary or instead an hourly wage. In fact, some non-exempt employees who work overtime, or who likely will be working overtime, will prefer to be paid by the hour, because they will be paid extra for working overtime, whereas they will understand that they will not be paid for what is typically considered overtime if they are paid a salary.
Employees would be well-advised to educate themselves on the wage and hours laws, especially California’s wage and hour laws, since their California employers are subject to those laws and will not fulfill their statutory duties to their employees simply by complying with federal law. Disgruntled or terminated employees should especially have a firm grasp on (1) whether they are exempt or instead non-exempt employees , and (2) if they are non-exempt, what they are entitled to in addition to pay for working more than 40 hours in a week or 8 hours in a day. Employees should also maintain their pay stubs, which reflect their hours worked during each pay period (although not necessarily the hours worked each day), and keep a record of the hours they work each day, for potential future use in seeking overtime pay to which they are entitled. The field of employment law is quite complex, and there are many issues not listed here which relate to federal and California wage and hour laws specifically, such as the requirements for meal breaks, rest periods, and child labor limitations.
Whether you are an employer or an employee, engaging the services of an experienced employment attorney is an excellent way to navigate the maze of federal and California labor laws. Employment law attorneys advise employers on their legal requirements to help them avoid potential fines or lawsuits, and advise and represent employees with respect to their rights and recourse should those rights be violated. Should litigation ensue, the employment law attorney can represent the clients in court or before the California Labor Board. If you are an employee or employer with questions concerning federal or state wage and hour laws, contact us for a free evaluation, or browse our website.
 FLSA: Bonuses and Calculating Overtime Pay, https://gehreslaw.com/how-are-bonuses-treated-under-the-flsa-when-calculating-overtime-pay/