Calculate Overtime Pay Correctly.

Authored by Steve Holden. Published in the Sacramento Business Journal February 2014.

overtime payOvertime pay for non-exempt employees is easy. Yes, easy to get wrong! Too many people handling payroll are under the misimpression that calculating and paying overtime is simple. Most will quickly tell you that an employee is due overtime if they work more than 40 hours in a week, and that the employee gets 1.5 times the employee’s regular rate for each extra hour. They are correct so far.  From here, however, the correct answers become increasingly sporadic and even this basic rule is often misunderstood. Technical rules, special exceptions and misleading legal terms make the proper calculation of overtime pay very difficult.  Employers can increase the likelihood of compliance by understanding the basic structural components of the calculation.

Use the Correct Law

The foundation for proper calculation is utilization of the correct law.  In the great majority of cases, both state and federal law apply.  Because California law is generally more favorable to employees, compliance with state law often ensures that the employer is also complying with federal law; but, not always. Both sets of rules must be checked.  The California rules are broken into two major parts; the Labor Code and the Wage Orders.  There are 17 Wage Orders, each applicable to a different industry or occupational set.  Most employers follow a single order, but some must follow different orders for different employees. Because the overtime rules vary from Order to Order, failure to use the correct Order is a sure way to miscalculate overtime.

Use the Correct Measurements

The proper calculation does not measure the number of hours in a week. They are measured over a “workweek” which is a predefined seven day period that may or may not correspond with the calendar week or an employee’s weekly schedule. California employers also must pay overtime on a daily basis. With some exceptions, employees are entitled to overtime pay when they work more than 8 hours in a workday. The “workday” is a predefined consecutive 24-hour period beginning at the same time each calendar day.  It does not, however, necessarily correspond with an employee’s scheduled workday. Any overtime calculation that fails to begin with the proper workday or workweek is very likely to be wrong.

Use the Correct Hours

The overtime calculation is based upon the hours worked.  “Hours worked” is defined as “the time during which an employee is subject to the control of an employer, and includes all the time the employee is suffered or permitted to work, whether or not required to do so.”  This broad definition includes time that an unknowing employer might not consider work time.  Although there are many, two of the most commonly misunderstood components of hours worked are travel time and training time.

Travel Time

The time an employee spends traveling to and from work is generally considered commute time and not counted as hours worked.  The rule can change, however, where an employee travels to work at a location that is not the employee’s normal work site.  The rule gets even trickier where an employee does not have a single assigned work site and is governed by how the work site is defined by the employer, the legitimacy of that definition and the duration at the assigned site(s).  The rule also changes with out-of-town travel.  Except for uninterrupted meals, all of the time spent in transit to the out-of-town location is included in the hours worked.  This is true even if the employee isn’t really working, i.e. sitting on a plane.

Training Time

The time an employee spends attending trainings, seminars and meetings is included in hours worked unless each of the following four criteria are met:

  1. The attendance is outside the employee’s regular working hours.

The attendance is voluntary.  It is not voluntary if the employee is led to believe that the employee’s employment would be adversely affected by nonattendance.

  1. The training, seminar or meeting is not directly related to the employee’s job. In other words, the event must provide value to the employee in terms of knowledge or skills the employee could use at other jobs.
  2. The employee does not perform any productive work for the employer during such attendance.

Use the Correct Rate

The most basic and most widely applicable rule for overtime in California: Employees who work more than 8 hours in a workday or more than 40 in a workweek must be paid at least 1.5 times the regular rate of pay for each excess hour up to 12 in a workday and the first 8 on the 7th consecutive day of work in a workweek.  Most employers know this basic rule, but too many misunderstand the term “regular rate of pay.”  Regular rate of pay is a legal term and does not mean the employee’s base, normal or “regular” hourly rate of pay.  If the employer uses different rates of pay for different work or provides incentive compensation, shift premiums or other forms of additional compensation, a complex calculation must be made to determine the legal “regular rate of pay.” Far too many employers simply use the employee’s base hourly rate thereby underpaying the required overtime.

This article outlines only the basic structural components for checking overtime compliance. It merely scratches the surface of the complexity for each component and does not address important topics such as make-up time, on-call time and alternative workweek schedules. Understanding the basics is an essential starting point.  Full compliance, however, can only be achieved by carefully examining and applying all of the technical rules.  Not an easy job.