How does the regular rate work? Once I calculate the regular rate, does it change the employee’s hourly rate? Do I have to calculate a regular rate and then go back and pay that rate for all straight-time hours worked as well as overtime hours?
These are common questions that we are asked about this subject. It can be confusing because the basic hourly rate is often referred to as the regular rate. For purpose of paying overtime, the actual regular rate includes additional payments as well.
The payment of overtime is based on remuneration an employee receives such as hourly earnings, nonexempt salary, piecework earnings, nondiscretionary bonuses, and commissions, etc. These amounts make up what is called an employee’s regular rate of pay.
Once the regular rate is determined, it is used as the basis to calculate overtime for nonexempt employees. It does not apply to exempt employees who are not owed overtime.
No, you do not have to change any straight-time wages already paid. The regular rate is used to calculate the overtime owed. Although this discussion is about overtime payment, the regular rate is used in other instances too, such as sick leave.
Not Part of ‘Regular Rate’
Not all additional pay is included in the calculation. The following is a partial explanation of those amounts that are excluded.
The following payments are not included in the regular rate of pay:
- Gifts, such as those received for holidays or birthdays.
- Hours paid but not worked, such as vacation, holidays, sick leave, etc.
- Reimbursement of expenses.
- Discretionary bonuses.
- Profit-sharing plans.
- Employee Retirement Income Security Act (ERISA).
- Overtime premium pay.
The California Division of Labor Standards Enforcement (DLSE) states: “In determining what payments are to be included in or excluded from the calculation of the regular rate of pay, California law adheres to the standards adopted by the U.S. Department of Labor (DOL) to the extent that those standards are consistent with California law.”
A more complete list and U.S. DOL references are found in Section 188.8.131.52 in the DLSE Enforcement Policies and Interpretations Manual.
Employers who offer additional pay should consult with legal counsel regarding the effect on overtime pay.