Back in January 2012 I blogged about regular rate issues as an anticipated hot issue for 2012 and beyond.
In that post I explained that the “regular rate” is not the rate an employer regularly pays. Rather it is the required overtime rate of pay that considers all compensation paid to the employee. I also explained that the reality is, for non-union employers who pay commissions, non-discretionary bonuses, service charges, and even provide perks (like free meals), the calculation of the regular rate of pay is a challenge.
But let’s assume you overcame that hurdle, and understand that you actually have to pay overtime at the “regular rate” that includes additional compensation. You should be good, right? No litigation, right? Well, not necessarily, especially if you haven’t correctly listed the correct “regular rate” on your paystubs.
Here’s the problem. California Labor Code Section 226 was amended in 2012 to provide that an employee is deemed to suffer an injury if the paystub is wrong. One of the items the employer is required to list on the paystub is “all applicable hourly rates in effect during the pay period and the corresponding number of hours worked at each hourly rate.” The goal is to make the paystubs transparent for the employees so they can understand how they have been paid.
Okay, that sounds simple, but when you actually follow the complicated math to compute the regular rate, it gives you the rate for the overtime premium, not the overtime rate. Yes, that’s right. You actually pay half of the regular rate.
For example, let’s say you have an employee who works at two rates in one work week: 20 hours @ $8 per hour and 25 hours @ $12 per hour. In addition, she earned a commission of $100 in that same workweek. If you do the math, the regular rate for overtime purposes is $12.44 per hour (that blends both rates and takes into account the commission paid). So what rates do you put on the paystub in a way that explains to this employee what she earned? If you put $12.44 and multiply it by the 5 hours of overtime, you’ve overpaid her for that week, because you only pay half of what she earned in the overtime rate. So, the paycheck needs to look something like this:
But will the employee understand why she is not earning $12.44 times 5 hours? Will she understand how the $12.44 rate is computed and that it is a calculation that blends her two rates and the commission earned? Is it better to list the overtime premium rate of $6.22 times 5 hours? Which way is more transparent? Hard questions with no easy answers, which is why I still think that regular rate issues will continue to be fodder for litigation for many years to come.
Many thanks to Jesse Koppin for his assistance with this post.