Click here for our most recent article about calculating overtime (updated Apr 27, 2018).

CALCULATING OVERTIME WITH EMPLOYEE BONUSES IN CALIFORNIA

Calculating overtime for weeks when a worker earns a “nondiscretionary” production bonus can be is a trap for unwary employers.  Under California and federal law, employers must calculate overtime pay based on an employee’s regular rate of pay.  “Regular rate” is not necessarily the same as an employee’s “straight hourly rate.”  The calculation for “regular rate” in each workweek is: i) all compensation earned (including all hourly pay and “nondiscretionary” production bonuses), ii) divided by the number of hours worked in that week.

Commonly, the overtime rate is 1.5 times the regular rate.  In California, there are situations where the overtime rate is double the regular rate (including hours worked after 12 hours in a given calendar day).

“Nondiscretionary bonuses” include any bonus promised to the employee which is either:

• Incentive to increase productivity, quality of work or attendance; or
• Paid under a contract, policy or promise that entitles the employee to the bonus.

A written bonus policy intended to motivate an employee to increase a defined production statistic is a nondiscretionary bonus policy.

A “discretionary” bonus would be extra pay not linked to any such incentive, contract, policy or promise. A holiday bonus is commonly considered such a discretionary and thus is not factored into regular rate calculations for the payment of overtime.

Overtime Calculation Example, with Non-Discretionary Bonus: Hourly employee “Bill Bonus” worked 52 hours last week, including 12 hours of overtime at “time and one-half.”  Bill’s hourly (straight) rate is $10.00.  Bill also earned a $138.00 production bonus attributable to last week.

Follow these steps to compute Bill’s total wages for the week:

Step 1.             Bill’s Regular Rate Calculation

52 total hours  x $10.00 hourly rate = $520.00

Bonus for the week = $138.00

Subtotal = $658.00

Regular rate = $658.00/52 hours = $12.65/hour

Step 2.             Bill’s Overtime (1.5x) Wage for the Week

($12.65/hr regular rate ÷ 2) x 12 overtime hours = $75.92

Step 3.             Bill’s Total Wages for the Week

Subtotal from Step 1 = $658.00

Subtotal from Step 2 = $75.92

Total = $733.92

Please see section 49.2.4.1 of the California Division of Labor Standards Enforcement (DLSE) Enforcement Policies and Interpretations Manual for an alternative method of computing regular rate involving overtime and a bonus (available online at http://www.dir.ca.gov/dlse/DLSEManual/dlse_enfcmanual.pdf).

If you have any questions on this or any other employment laws, please contact us or any of our other employment law attorneys.