In general, non-exempt employees who work overtime are entitled to premium overtime pay, calculated based on their regular rate of pay. For purposes of calculating overtime under both federal and California law, the regular rate of pay must include certain incentive pay, such as non-discretionary bonuses and shift differentials.
On November 1, 2022, the U.S. Ninth Circuit Court of Appeals discussed in Bowen v. Target Corp. how to properly calculate the regular rate of pay for California employees who work shift differentials and receive holiday premium pay. Plaintiffs brought a class action lawsuit against Target, alleging the company’s method of calculating overtime pay for workers who were paid a shift differential and/or holiday premium pay violated California law. The company calculated the employees’ regular rate of pay by using total hours worked in the workweek, which included overtime hours, rather than non-overtime, straight hours worked.
Under California law, non-discretionary bonuses are calculated in two ways, and it depends on which type of bonus the employee receives: either a production bonus or a flat-sum bonus. A production bonus under California law is “based on a percentage of production or some formula other than a flat amount [which] can be computed and paid with the wages for the pay period to which the bonus is applicable.” To calculate the regular rate of pay that includes a production bonus, the employer would divide the bonus by the total hours worked, including overtime, during the period to which the bonus applies. By contrast, a flat-sum bonus is a bonus that is not an incentive for increased production, but for example, a flat $300 for continuing employment to the end of the season. To calculate the regular rate of pay for a flat-sum bonus, the employer would divide the bonus by the maximum legal regular hours (i.e., straight time) worked during the period to which the bonus applies. The distinction is important – production bonuses are tied to hours worked, while flat-sum bonuses are not.
In Bowen, the plaintiffs argued that Target should have calculated their regular rate of pay, which included shift differentials and holiday premium pay, similar to a flat-sum bonus, using only straight-time hours. Doing so would have resulted in a higher regular rate of pay and, thus, a higher rate of pay for the overtime premium. The Ninth Circuit disagreed and held that Target’s method of calculating overtime was correct. It reasoned that “[i]n contrast to flat-sum bonuses, shift premiums are not fixed; they are hourly payments and are proportional to hours worked. Accordingly, an hourly bonus paid for a shift differential or holiday premium directly correlates to the number of hours worked and will increase as an employee works additional overtime.”
The Bowen decision is an important reminder for California employers on how to properly calculate an employee’s regular rate of pay for overtime purposes. If you have any questions about how to calculate an employee’s regular rate of pay that includes any type of incentive payment, please contact our California Legal Services team at CAinfo@employerscouncil.org.
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