Determining an employee’s “regular rate of pay” is critical for paying the proper amount of overtime. For employees who are paid the same hourly rate at all times and nothing else, determining the “regular rate” is easy. But for dual rate employees, it’s a little trickier.
A recent case provides guidance and some options to California employers. In Levanoff v. Dragas (2021) 2021 WL 2621360, the court was asked to determine if the “weighted average” method for determining the “regular rate” was required by California law, or if employers could use the “rate in effect” method.
The “weighted average” method pays dual rate employees overtime based on a “regular rate” calculated by adding all hours worked in one pay period and dividing that number into the employee’s total compensation for the pay period. The “rate in effect” method pays dual rate employees overtime at the hourly rate in effect at the time the overtime hours began.
The employees in Levanoff received a higher hourly rate during hours they were working in a management trainee program, which was generally at the end of their shifts. Hence, the employees were paid overtime based on the higher hourly rate in effect when the overtime hours began.
Although the Department of Labor Standards Enforcement (DLSE) Manual endorses the “weighted average” method, the DLSE Manual does not have the force of law. The Levanoff court found that the employer’s use of the “rate in effect” method of determining the “regular rate” complied with California law because the policy was both neutral on its face and in practice. Importantly, the undisputed evidence demonstrated that the policy was beneficial to the total employee group over time, meaning that the employees – as a whole – were paid more in overtime pay under the “rate in effect” method than they would have been paid under the “weighted average” method, even though some individual employees were paid less.
Employers with dual rate employees now have the option to consider whether the “rate in effect” method, which makes the calculation of overtime much easier, would be beneficial. Individual factors in the creation and implementation of such a policy would need to be assessed to determine if the particular situation would be considered neutral for its employees and compliant with the law.
Related practice team: Labor and Employment
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