Here are some of the most common issues and how to address them so that you don't have any payroll nightmares before Christmas.

Regular rate of pay

Overtime under both federal and California law is based on a multiple of the “regular rate of pay.” Under both laws, the regular rate of pay is not necessarily an employee’s base hourly wage. Instead, it includes nearly all forms of compensation, including the following:

• Hourly wages
• Piecework earnings
• Commissions
• Nondiscretionary bonuses
• Shift differentials
• Room, board, and lodging paid as part of an employee's wages
• Cash in lieu of benefits
• Cost of living allowances.

In short, the regular rate of pay takes into consideration virtually all forms of compensation for hours worked during the week.

Exclusions from the regular rate of pay may also raise complicated legal issues. Here is a list of the exclusions that apply under the federal Fair Labor Standards Act. (Scroll down to subsection (e).) California’s exclusions are similar.

Effect of bonuses on overtime rates

During the holidays, many employers offer end-of-year or holiday bonuses. Under the FLSA, bonuses can be excluded from the regular rate when they are “sums paid as gifts; payments in the nature of gifts made at Christmas time or on other special occasions, as a reward for service, the amounts of which are not measured by or dependent on hours worked, production, or efficiency.”

Likewise, sums paid in recognition of services performed during the year may be exempt if “both the fact that payment is to be made and the amount of the payment are determined at the sole discretion of the employer at or near the end of the period and not pursuant to any contract, agreement or promise causing the employee to expect such payments to be made.”

Unfortunately, many employer-paid holiday or Christmas bonuses do not meet these criteria. If a holiday bonus is based on objective measures, such as an employee's hours worked, productivity, quality of work, attendance, or some other predetermined metric, courts are likely to find that the bonus is “nondiscretionary.” Likewise, if there is any contract or agreement stating that the employee will receive payment for meeting certain goals, such as educational achievement or a retention bonus, the payment is nondiscretionary. Even an employer's promise to pay a bonus in advance may mean that the payment is nondiscretionary.

The FLSA regulations regarding nondiscretionary bonuses are available here.

If a payment is found to be a nondiscretionary bonus, it must be included in the regular rate calculation when determining overtime pay for the applicable time period. If the holiday bonus is attributable to work for the entire year, then the regular rate of pay for any pay period in which the employee earned overtime in the past year must be recalculated. Where employers often run into trouble is when they distribute holiday bonuses but neglect to retroactively adjust overtime calculations.

If an employee worked overtime during a period covered by the bonus and the bonus is nondiscretionary, the employer must revisit the overtime pay for that period and recalculate it based on the adjusted regular rate that includes the bonus.

Holiday pay

Under federal and California law, there is no legal requirement to pay a holiday premium (for example, time-and-a-half) simply because an employee works non-overtime hours on a holiday. However, many employers choose to do so as a policy or pursuant to the terms of a collective bargaining agreement. Employers may offer “holiday pay” in several ways. 

If holiday premium pay is offered as a fixed or guaranteed premium that is nondiscretionary and linked to hours worked on the holiday, this premium generally should be included in the regular rate of pay. There is an exception if the holiday pay already exceeds the overtime rate that an employee would otherwise earn. 

On the other hand, payments made for occasional periods when no work is performed due to holidays may be excluded from regular rate of pay calculations.

These holiday pay provisions apply under the FLSA and also under California law.

California flat sum bonuses

California departs from federal law regarding overtime calculations as the result of “flat sum bonuses.” A flat sum bonus is a fixed amount paid to employees that is not based on the number of hours worked or their productivity. Examples could include safety bonuses or flat sums paid for holiday work (such as $100 extra to work on Christmas Day or New Year's Eve). 

In California when determining the regular rate of pay, an employer must divide the flat sum bonus amount by the number of non-overtime hours worked during the pay period, rather than by the total hours (including overtime) as is generally permissible under federal law. This calculation can result in a higher overtime rate for employees.

Beyond overtime

Many employers believe the regular rate of pay applies only to overtime calculations. In California, however, the regular rate of pay also applies to the following:

• Meal and rest break premiums: If an employee does not receive a meal or rest break that complies with California law, the premium pay (one hour of pay at the “regular rate of compensation”) is based on the same calculation principles used for the regular rate of pay. If nondiscretionary bonuses or holiday premiums apply, they must be included in this calculation.
• Paid Sick Leave laws: Under California’s Paid Sick Leave laws (and some local sick leave ordinances), employees using paid sick leave must be paid at their regular rate of pay.

Conclusion

The holidays can be a particularly tricky time for all employers – but especially California employers – when it comes to properly calculating employee pay. Understanding the regular rate of pay, the existence and effect of nondiscretionary bonuses, and the impact of holiday premiums on overtime, meal break premiums, and paid sick leave is critical. Given the complexity and costly penalties associated with wage and hour violations in California, employers should consult with their legal counsel and closely coordinate with Human Resources and payroll to ensure compliance.