Understanding “Regular Rate of Pay”
If you’ve attended an HR or employment law update in the last month, you’ve heard about “regular rate of pay” in connection with overtime and paid sick leave laws. Depending on how you compensate your employees, regular rate of pay is not necessarily the same as hourly wages.
Regular rate of pay considers all compensation you provide to employees within a standard workweek. This includes:
- Salaries (divided by hours worked)
- Commissions
- Bonuses (non-discretionary)
- Shift differentials for shifts worked outside of standard business hours
- Piece-rate earnings based on goods produced
Why does this matter?
In California, “regular rate of pay” is used to calculate both overtime and paid sick leave. An inaccurate calculation translates to underpaying employees and potential penalties for your business.
How to calculate an employee’s regular rate
The basic formula for regular rate of pay is:
Total Employee Earnings in a Workweek / Total Employee Hours Worked in a Workweek
If an employee doesn’t typically work the same number of hours each workweek, an employer has the option of averaging out hours over a 90-day “look-back period” using this formula:
Total Employee Earnings in the Previous 90 Days / Total Hours Worked in the Previous 90 Days
Let’s looks at some examples:
Example 1: Basic hourly rate with no additional compensation
Alex is paid $18/hour and works 32 hours per week. Alex is not paid commissions, bonuses, or piece-rate earnings, and does not receive a shift differential. Alex’s total employee earnings in a workweek are $576 ($18 x 32), divided by total hours worked in a workweek (32) = $18/hour.
When Alex calls in sick or works overtime, his compensation is calculated using the regular rate of $18/hour. In this example, because Alex doesn’t receive any additional forms of compensation, his regular rate is the same as his hourly rate.
Example 2: Differing hourly rates
Sarah is paid $18/hour to perform administrative services, and $25/hour to perform payroll services. In the previous workweek, Sarah spent 30 hours on administrative services and 10 hours on payroll services, for a total of 40 hours. Sarah’s total employee earnings for the week are
($18 x 30) + ($15 x 10) = $690, divided by total hours worked (40) = $17.25/hour.
If Sarah uses 8 hours of paid sick leave on Monday, she’ll be paid at a rate of $17.25/hour. If Sarah works for 8 hours on Monday and puts in 2 hours of overtime, she will receive $25.88 per hour for each hour of overtime she works (1.5 x $17.25)
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