Guidance on ‘regular rate’ may be forthcoming

THIS COLUMN APPEARED IN THE 2018 LABOR AND EMPLOYMENT SUPPLEMENT

The "regular rate" plays an essential role in an employer's ability to properly compensate its employees given that this rate is used to calculate overtime premiums. An employee's regular rate differs from an employee's straight time hourly rate and varies depending on how or if additional forms of compensation paid to the employee must be factored into the regular rate calculation. As such, calculating an employee's regular rate is often a confusing endeavor.

Under the Federal Labor Standards Act, a nonexempt employee must be compensated "at a rate not less than one and one-half times the regular rate at which he is employed" for any hours worked in excess of forty hours in a workweek. The FLSA defines the "regular rate" to "include all remuneration for employment paid to, or on behalf of, the employee," while also including a list of eight categories of exceptions. As such, significant confusion may arise when attempting to determine whether a certain form of compensation is to be included in the regular rate calculation.

Federal law provides some guidance regarding amounts that do not impact the regular rate, but some categories, such as "other similar payments to an employee which are not made as compensation for his hours of employment," have left employers and courts with little guidance. For instance, the 9th U.S. Circuit Court of Appeals, in Flores v City of San Gabriel, 824 F.3d 890, 900 (9th Cir. 2016), held that cash-in-lieu benefit payments should not be excluded from the regular rate as "other similar payments" because they were "properly considered compensation for work." regardless of whether the payments had any relation to the hours of work or amount of services provided. Moreover, the 3rd Circuit, in Minizza v. Stone Container Corp. Corrugated Container Div. E. Plant, 842 F.3d 1456, 1463 (3d Cir. 1988), held that lump sum payments made to employees in lieu of a wage increase were properly excluded as "other similar payment" because the payments were not tied to work hours. Fortunately, there may be some much needed clarity on the horizon. In May, the U.S. Department of Labor announced that it will "clarify, update, and define [the FLSA's] regular rate requirements."

Additional clarity of the FLSA may not prove to be too reassuring for California employers. This is readily apparent in the recent decision from the California Supreme Court in Alvarado v. Dart Container Corp. of California, 4 Cal. 5th 542 (2018). At issue in Alvarado was how to calculate the regular rate under California state law. The trial court and court of appeal concluded that "[i]n the absence of any valid California law or regulation on point, ... the relevant federal regulation must be followed, and because defendant's method was compliant with the federal regulation." While the California Supreme Court agreed with the lower courts in holding that interpretative policy issued by the Department of Labor Standards Enforcement in its manual is a void underground regulation not entitled to any special deference, it still departed from the federal law regular rate calculation. The court interpreted the "regular rate of pay" to require the flat sum bonus "be factored into an employee's regular rate of pay by dividing the amount of the bonus by the total number of nonovertime hours actually worked during the relevant pay period and using 1.5, not 0.5 as the multiplier for determining the employee's overtime pay rate."

Notably, the California Supreme Court determined that it was "obligated to prefer an interpretation that discourages employers from imposing overtime work and that favors protection of the employee's interest," and was persuaded by the DLSE's interpretation. Specifically, it noted that "the obligation to pay premium pay for overtime work reflects a state policy favoring an eight-hour workday and a six-day 40-hour worker" and that "the state's labor laws are to be liberally construed in favor of worker protection."

The Alvarado decision will generally result in a higher regular rate under California law than under federal law. This will undoubtedly concern many employers as California employees are not only entitled to overtime for hours worked in excess of forty in a workweek, but also for hours worked in excess of eight in a workday, in addition to receiving twice the regular rate for all hours worked in excess of twelve in a single workday and for all hours worked in excess of eight on the seventh consecutive day of work in in a work week. Moreover, California employee's "regular rate" is used to calculate more than just overtime compensation. For instance, the regular rate is used to calculate paid sick leave under state and local ordinances. It is also used to calculate the penalty to be paid to employees if an employer fails to provide a meal or rest period.

An inaccurate regular rate calculation can lead to an extraordinary amount of liability for employers, as was recently the case in Ibarra v. Wells Fargo Bank N.A., 2018 WL 2146380 (C.D. Cal. May 8, 2018), in which the district court awarded $97.28 million for missed meal break class claim. In Ibarra, the district court disagreed with Wells Fargo's proposed method for determining the regular rate, which would have resulted in $24.47 million in damages. Rather, it concluded that the "regular rate of compensation" was not limited to the class members' hourly rate, but included all other forms of "qualifying compensation," including incentive pay and commissions.

Ultimately, California's varying use and treatment of the regular rate does not mean that the FLSA and its regulations have no impact in California. To the contrary, California courts continue to look to the FLSA for guidance. Nonetheless, although additional clarity from the U.S. Department of Labor is welcome, it is important for employers to remember, particularly in California, that merely complying with federal law may not be sufficient to be legally compliant, and, thus, employers should be sure to seek legal counsel due to the complexity and risk surrounding the use and proper calculation of its employees' regular rates.

The opinions expressed are those of the authors and do not necessarily reflect the views of the firm, its clients, or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.