A California Court of Appeal recently rebuffed a long-held Division of Labor Standards Enforcement (DLSE) enforcement position on how overtime must be calculated for dual-rate employees, opening the door for use of the “rate-in-effect” method approved under federal law.

The plaintiffs in the case Levanoff v. Matthew Dragas, et al. were hourly servers, bartenders, and trainers of several Buffalo Wild Wings restaurants in California that were owned by the defendant. Some of the employees were paid regular hourly rates and an elevated training rate during the workweek. Levanoff brought a wage and hour class action and a Private Attorney General (PAGA) claim on behalf of all hourly employees which included a claim on behalf of employees who worked “over eight (8) hours in a day or forty (40) hours in a week without receiving proper overtime payments because the overtime payments were calculated using the lower regular rate of pay.”

Determining the “regular rate of pay” for purposes of calculating overtime can be an illusive and complicated process. Many unsuspecting employers simply use the employee’s base hourly rate to determine overtime at time and a half or double time (i.e., a $15.00/hour employee is paid $22.50 for each overtime hour worked or $30.00 for each double-time hour worked).

However, when employees receive additional non-discretionary bonus compensation or are paid two or more rates during the workweek, a different calculation applies. Bonuses must be added to the total weekly compensation in order to determine the per-hour “value” of the bonus for overtime purposes. Employers paying two or more rates, such as for regular work and for driving/travel time, must take both rates into consideration. The method traditionally used to achieve the appropriate regular rate in California has been what is known as the weighted average method:

Where two rates of pay are paid during a workweek, the California method for determining the regular rate of pay for calculating overtime in that workweek [is] the weighted average of all hourly rates paid …

(DLSE Manual Sec. 49.2.5.)

The DLSE Manual goes on to describe the weighted average calculation process which is established by adding all hours worked in the workweek and dividing that number into the total compensation for the workweek. These calculations often involve complex math equations that can frustrate even the most accomplished accounting and payroll department employees.

Rate-In-Effect Overtime Calculation Method

There is, however, another method approved under the Federal Fair Labor Standards Act (FLSA) called the rate-in-effect method. Using this method, the regular rate of pay used to calculate overtime is the hourly rate that is in effect at the time the overtime hours began. This method is practical and simpler, so employers often apply the rate-in-effect to determine the appropriate regular rate for purposes of calculating overtime.

That was the case for employees working at the Buffalo Wild Wings franchises in Levanoff as they were paid based on the rate-in-effect method. Thus, during the final hours of the workday, some workers participated in a management training program that paid a higher rate than other shifts, so the company used that “rate-in-effect” as the regular rate for overtime. The employees argued the “weighted average” method was the required approach in California.

A trial on the issue resulted in a finding for the employer holding: “California law does not mandate use of the weighted average method.” In a lengthy opinion, the court explained that “statements in the DLSE Manual are not binding,” and other Supreme Court authority on the use of the weighted average method applied to bonuses and not necessarily “dual rate” employees.

How Does This Ruling Effect California Employers?

First, it allows employers who have used rate-in-effect to argue that method is now acceptable for use in California (although the court made clear its decision was based on the facts of the case). Second, it gives employers further ammunition in defense of class and PAGA actions to challenge application of DLSE enforcement positions as “not binding.”

What Should Employers Do After Levanoff?

Review how payroll is determining the regular rate of pay. If the weighted average method is used, conduct a spot audit to be sure overtime is being calculated accurately (be mindful that any inaccuracies could be grounds for wage statement violations under Labor Code 226).

If the rate-in-effect method is being used for dual-rate employee compensation, be sure the company is notifying employees at the outset that the method the company will use to compensate for different work at different rates of pay will be “rate-in-effect” (the federal law requires an “agreement or understanding” as to the method before employees start work).

In addition, seek counsel on whether the use of the rate-in-effect method results in a net benefit (and avoids net losses to employees). The court in Levanoff stated that whether the use of the rate-in-effect method would be lawful depends on the overall effect on all dual-rate employees. This requires appropriate evidence of the net impact on employees through overtime analysis of all non-exempt employees.

Finally, employers should be cognizant that wage hour class and PAGA representation actions continue to be on the rise, so wage and pay practice compliance is more important than ever. Even the smallest pay or record-keeping errors can subject companies to large defense costs, damages, penalties, and attorney’s fees.