Many employers use commission and bonus structures to reward and incentivize their employees for hard work. These are often tied to sales goals, completing a busy season, or hitting specific targets. Some employers provide housing, meals, or piecework pay to employees. While all of these benefits can be great motivators, there’s an often-overlooked aspect when paying non-exempt employees that can lead to costly errors. Employers who offer these types of benefits to non-exempt employees are encouraged to ensure that they are properly calculating the “regular rate of pay.” The regular rate of pay affects overtime, paid sick leave, meal break premiums, rest break premiums, and reporting time pay.
These types of additional compensation and benefits affect a non-exempt employee’s regular rate of pay, which is not the same as an employee’s base rate of pay. Failing to factor non-discretionary bonuses, commissions, and certain other types of compensation into an employee’s regular rate of pay will lead to underpayment of the employee, which could result in penalties and back pay claims.
What is the “Regular Rate of Pay”?
In simple terms, the regular rate of pay includes more than just an employee’s base hourly rate. It encompasses all compensation that a non-exempt employee earns, including non-discretionary bonuses, commissions, piecework pay, and other forms of remuneration. It includes bonuses that are guaranteed based on performance or specific criteria, such as meeting sales quotas or working certain shifts. These amounts must be included when calculating overtime pay, paid sick leave, meal and rest break premiums, and reporting time pay for non-exempt employees.
What’s Not Included in the “Regular Rate of Pay”?
Not all types of pay are included in the regular rate of pay. Exclusions include:
- Gifts (like those for holidays or birthdays)
- Hours paid but not worked (for example, vacation pay, sick leave, and holiday pay)
- Reimbursement for business expenses
- Discretionary bonuses (those not promised in advance)
- Profit-sharing plans
- Premium pay for overtime
How Non-Discretionary Bonuses Affect “Regular Rate of Pay” Calculations for Overtime Pay
There are two main types of non-discretionary bonuses that affect the regular rate of pay: flat-sum bonuses and production bonuses. Let’s look at how each is handled.
Non-Discretionary Flat-Sum Bonuses
A flat-sum bonus is a fixed amount that doesn’t fluctuate based on production. For example, an employer might offer a $500 bonus to employees who work through the holiday season, or an additional $10 per day to work a weekend shift.
The following details how to calculate the overtime pay owed to an employee who earns a flat-sum bonus:
- Determine the Per-Hour Value of the Flat-Sum Bonus:
Divide the total bonus amount by the number of non-overtime hours worked during the bonus period.
Example:
An employee earns a $2,000 flat-sum bonus for working 80 non-overtime hours in a two-week pay period.
$2,000 bonus ÷ 80 hours = $25.00 per-hour value of the bonus - Calculate the Overtime Bonus Rate:
Multiply the per-hour value of the bonus by 1.5 for overtime hours or 2.0 for double-time hours.
Example:
$25.00 per-hour value of the bonus × 1.5 = $37.50 overtime bonus rate - Determine the Total Overtime Due:
Multiply the overtime bonus rate by the number of overtime hours worked during the bonus period.
Example:
$37.50 overtime bonus rate × 5 overtime hours = $187.50 additional overtime owed
Non-Discretionary Production Bonuses
A production bonus is tied to an employee’s output, such as paying a percentage of sales or units produced or sold. When calculating overtime for a production bonus, the total bonus is divided by all hours worked (both regular and overtime). Then, the per-hour value of the bonus is multiplied by 0.5 to find the additional overtime pay owed. To properly calculate the overtime owed when a production bonus is involved, follow these steps:
- Determine the Per-Hour Value of the Production Bonus:
Divide the bonus by the total hours worked including straight time and overtime hours.
Example:
An employee earns a $2,000 production bonus for 85 total hours worked in a two-week period.
$2,000 bonus ÷ 85 hours = $23.53 per-hour value of the bonus - Calculate the Overtime Bonus Rate:
Multiply the per-hour value by 0.5 for overtime hours or 1.0 for double-time.
Example:
$23.53 per-hour value of the bonus × 0.5 = $11.77 overtime bonus rate - Determine the Total Overtime Due:
Multiply the overtime bonus rate by the number of overtime hours worked during the bonus period.
Example:
$11.77 × 5 overtime hours = $58.85 additional overtime owed
Why This Matters for Employers
It’s essential for employers who offer any form of non-discretionary bonuses, commissions, or certain other remuneration to ensure these amounts are correctly factored into the regular rate of pay for non-exempt employees, including for overtime calculations. Ignoring this requirement can lead to substantial penalties, back wages, and potentially legal disputes.
By understanding how to correctly calculate the regular rate of pay, employers can protect their businesses from potential liabilities and ensure their employees are fairly compensated.
Key Takeaways for Employers
- Understand the Regular Rate of Pay: The regular rate of pay includes more than just an employee’s base hourly rate. It encompasses additional compensation like bonuses, commissions, and other non-discretionary payments and remuneration.
- Calculate Overtime, Paid Sick Leave, Reporting Time, and Meal and Rest Break Premiums Correctly: Be sure to include all applicable bonuses, commissions, and other non-discretionary earnings when calculating the regular rate of pay. Remember that flat-sum and production bonuses have different methods for determining the regular rate of pay.
- Review Your Policies: Regularly audit your payroll practices to ensure compliance with both state and federal guidelines. Miscalculations can lead to costly penalties and back-pay claims. Ensure you’re consistently reviewing and updating payroll practices to avoid errors.
For more detailed guidance, including calculation examples and requirements, the Division of Labor Standards Enforcement (DLSE) offers helpful resources. You can visit their official guidance here: https://www.dir.ca.gov/dlse/faq_overtime.htm and read about specific insights in the DLSE Manual here: https://www.dir.ca.gov/dlse/DLSEManual/dlse_enfcmanual.pdf
If you need help reviewing your policies or calculating the regular rate of pay, we’re here to help! Reach out to our team for personalized support.
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