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BEWARE OF BONUSES AFFECTING OVERTIME CALCULATIONS

Overtime is paid at the employee’s “regular rate of pay”.   Some new court decisions and subsequent interpretations have also provided that non-discretionary production bonuses, must be included in an employee’s “regular rate of pay” before figuring overtime payments.

The definition of an non-discretionary production bonus is: The employer predetermines the specific criteria that is required to receive a bonus. Employees expect to earn the bonus if they meet the criteria. An employer’s incentive pay plan that provides additional compensation for exceeding performance or productivity goals is an example of how nondiscretionary bonuses are executed in the workplace. 

To calculate overtime for an employee with this bonus program, you must allocate the bonus dollars over the time period the employee earned the bonus (week, month, year, etc.)  The courts explained it this way:

  • Take the bonus earned during the bonus period;
  • Divide the bonus by the total number of hours worked during the bonus period;
  • Multiply the resulting number by 0.5; and
  • Multiply the resulting number by the total number of overtime hours worked during the bonus period.

You must then show this amount on the wage statement (payroll stub) for the pay period that the bonus is paid.

Here is a hypothetical offered by the court:

The hypothetical employee earned a $360 monthly bonus for work performed during the previous month of December, from December 1 to December 31, 2017. This bonus would be reflected on the January 7 to January 20, 2018 wage statement. To calculate the OverTimePay-Override line, the hours worked in December 2017 would be used because that is the time period in which the bonus was earned. In this hypothetical, the employee had worked 160 regular hours and 20 overtime hours in December 2017, for a total of 180 hours. First, divide $360 by 180, which results in $2. This number represents the increase to the regular hourly rate. Multiply $2 by 0.5 and the result, $1, represents the increase to the overtime hourly rate. Then, take $1 and multiply it by 20, the overtime hours worked during December 2017, and the result, $20, is the overtime pay adjustment, which would be identified as the OverTimePay-Override line on the wage statement.​

This is not the calculation you would use for a flat-rate bonus.  The court said that the flat-rate bonus should be calculated as: A flat sum bonus is “factored into an employee’s regular rate of pay by dividing the amount of the bonus by the total number of non-overtime 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.”

This reasons that a bonus would be further diluted if you include all hours including overtime hours in the calculation.

California has more information about how to calculate overtime for different situations.  Here are a few common questions but you can find more at https://www.dir.ca.gov/dlse/FAQ_Overtime.htm

3. Q. Is a bonus included in the regular rate of pay for purposes of calculating overtime?

A. Yes, if it is a nondiscretionary bonus. A nondiscretionary bonus is included in determining the regular rate of pay for computing overtime when it is based upon hours worked, production or proficiency or as an incentive to remain employed by the same employer. Incentive bonuses include flat sum bonuses. Flat sum bonuses must be computed by dividing the bonus by the maximum legal regular hours worked, not by the total hours worked during the pay period. Bonuses designed as an incentive for increased production for each hour worked are divided by the total hours worked in the pay period. Discretionary bonuses or sums paid as gifts at a holiday or other special occasions, such as a reward for good service, which are not measured by or dependent upon hours worked, production or efficiency, are not included for purposes of determining the regular rate of pay.
4. Q. Are any amounts excluded from the regular rate of pay?
A. Yes, there are certain types of payments that are excluded from the regular rate of pay. Examples of some of the more common exclusions are sums paid as gifts for special occasions, expense reimbursements, payments made for occasional periods when no work is performed due to vacation, holiday, illness, failure of the employer to provide sufficient work, premium pay for Saturday, Sunday, or holiday work, and discretionary bonuses.
5. Q. Are salaried employees entitled to overtime?
A. It depends. A salaried employee must be paid overtime unless they meet the test for exempt status as defined by federal and state laws, or unless they are specifically exempted from overtime by the provisions of one of the Industrial Welfare Commission Wage Orders regulating wages, hours and working conditions.
6. Q. How is overtime calculated if I work at different rates of pay in the same workweek?
A. If you are paid two or more rates by the same employer during the workweek, the regular rate is the “weighted average” which is determined by dividing your total earnings for the workweek, including earnings during overtime hours, by the total hours worked during the workweek, including the overtime hours. For example, if you work 32 hours at $11.00 an hour and 10 hours during the same workweek at $9.00 an hour, the weighted average (and thus the regular rate for that workweek) is $10.52. This is calculated by adding your $442 straight time pay for the workweek [(32hours x $11.00/hour) + (10 hours x $9.00/hour) = $442] and dividing it by the 42 hours you worked.

 

ALERT!! NEW CALIFORNIA SUPREME COURT RULING ON OVERTIME–MUST READ!

Overtime pay in California is based on the employee’s “regular rate of pay,” which is not always an employee’s normal hourly wage and must include almost all forms of pay that the employee receives.

Yesterday, the California Supreme Court ruled that an employer must calculate the regular rate of pay by dividing the employee’s total compensation by the number of non-overtime hours an employee worked during the pay period, rather than the total number of hours the employee worked, including overtime hours (Alvarado v Dart Container Corporation of California).

Many of you may pay your employees a premium for working on a weekend or a night shift and you should be aware of this distinction in the law.   Others may pay a “make up amount” to compensate workers who have changed from a daily or weekly rate to an hourly rate and have a separate line to increase their pay to meet a minimum payment.  It may be subject to increased overtime rates as well.  This may eventually extend to housing or other items that are considered part of the regular compensation package.  It may all need to be included at some point as this ruling evolves.

In the case, Dart Container Corporation of California, allegedly maintained a policy of paying a flat “attendance bonus” of $15 per day to employees who worked Saturday and Sunday shifts, regardless of the number of hours worked on the weekend shift. An employee sued, claiming he was improperly paid overtime during the weeks that he earned the weekend attendance bonus.

The employee argued that overtime pay on any flat sum bonus should be divided only by the “regular” hours he worked that week (the method in the Division of Labor Standards Enforcement [DLSE] manual), not by the “total” hours worked during the week (regular hours plus overtime hours worked, the federal formula). For example, to determine the employee’s regular rate of pay, you would divide only by 40 regular hours instead of 48 total hours (regular hours plus overtime hours). This would result in a higher regular rate of pay and, thus, a higher overtime rate.

The California Supreme Court unanimously reversed the lower court and approved the DLSE method of calculating the regular rate of pay when a flat sum bonus is involved: Employers must divide the employee’s total compensation by the employee’s non-overtime hours worked (not by the total hours worked).

The Court reasoned that a flat sum bonus is not tied to the number of hours worked – the $15 will be paid when an employee picks up a weekend shift, regardless of how many hours the employee worked that week. Because the flat sum bonus was payable even if the employee didn’t work overtime, only the non-overtime hours should be considered when calculating the regular rate of pay.

The Court also based its ruling on two other policy factors:

  • California law requires premium overtime pay which is meant to discourage employers from imposing overtime work.
  • California labor laws are interpreted liberally in favor of worker protection.

The Court also decided that this ruling should apply retroactively, not just going forward.

This decision is limited to flat-sum bonuses, but we may see employees argue that it should apply to other types of extra compensation.

We strongly urge employers who want to give “extra pay” to hourly workers should consult legal counsel.

UPDATE TO CALIFORNIA IRRIGATORS AND OVERTIME

Late last  year and early this year we discussed the new Agriculture Labor laws going into effect in California.  Mostly it was centered on the reduction of hours over time from a 10 hour work day to an 8 hour work day.

However, in the language of the bill was a very important phrase that said this bill affects “all Agricultural workers”.  This created quite a stir among lawyers and the split was about 50\50.  Some took this literally to mean that all workers in the agriculture profession, were now subject to the same rules and there would be no exceptions.  Others, pointing to the history going back the the 1930’s that exempted irrigators from the overtime regulations, that this would be cleaned up by the Labor Commissioner who is charged with rewriting the Wage Orders to comply with the legislation.

So far, we have not seen a new Wage order 14 so the one that is on the books is all we have to direct our work for now.

At the beginning of the year, we advised people, based on legal opinions, to continue treating irrigators as exempt employees until we heard from the Labor Commissioner.  At that time, we figured we would see something in writing by March and since it was raining, most employers were not working irrigators over 10 hours a day.  However, now we are into July with no definitive answer.  So, at this point, we are changing our recommendations, and it is our opinion that you SHOULD pay irrigators for overtime if they work over 10 hours in a day or over 60 hours in a week, just as you do other workers.

We base this opinion on the following:

  1. Previously, if the decision came down that you would have to pay overtime to irrigators going back to January 1, 2017, we were most likely not talking about a lot of hours and the employer can pay it out in one check and would most likely avoid any penalty fines.
  2. Now that we are in the heat of the year and irrigators are working full time, there is more possibility of them working overtime and the bill to pay back-wages is increasing.  At this time, it would be better to pay overtime incurred since July 1 and if we hear later that you must pay overtime from January 1, you can still pay that smaller amount in one check and avoid penalties.
  3. We don’t want to create a situation where you have many employees who have moved on to other employers and they come back to you and accuse you of not paying overtime.  This becomes more of an issue as time goes by.

The decision to pay overtime is still your at this writing, but we feel it is the better position to pay it now and avoid more trouble potentially in the future.  Even if the Labor Commissioner ultimately corrects the wording or interpretation and exempts irrigators from overtime, it is a small price to pay for avoiding litigation later.

Final Thoughts on 2016 and a Caution to Legislators and Employers for 2017

I will begin this by saying that some of this article is focused on California, while much can be applicable to the rest of the United States.  The San Joaquin Valley is a microcosm of what has taken place across this country.  The rural, farming and agriculture areas of this country are tired of being ignored.   And finally, they stood up in November and got the attention of the people that think that life is only lived in big cities.

California politicians are very good at double speak.  They say they are supportive of Agriculture, but none of them every actually come to the Valley to talk to business owners.  On the rare occasion they do come to the Valley it is to talk to the workers or to point at a High Speed Rail train that is not going to do anything for people here.

The fact is, California, and many State governments across the country, would prefer if Agriculture would just go away.  They would much rather we were all working in a state full of Silicone Valley businesses.  They are cleaner, there would be no fight over water, and we could just ignore it altogether.  In the past election, we did not get visits by Hillary (Trump dropped in quickly) and Kamala Harris (the new Senator) didn’t bother with and knows nothing about this side of California.  The Governor has only been to Fresno a few times in 6 years and that is never to learn about real issues (he knows it all I guess).

For the rest of the country, the story is similar.  President Obama flew over the rest of the US and only visited a few coastal states in 8 years in office.  He came to California almost monthly to San Francisco or Los Angeles to attend a fund raiser, but on the ONE occasion that he came to the valley to discuss the drought, he got off the plane, went to a dirt field for about 1 hour and then flew out because he had a golf date in Southern California (where they had water to make beautiful greens for his putting).  We never saw a thing done about the drought after that and still have not until last week when a bill (0pposed by outgoing Senator Barbara Boxer) was signed by the President to help us build dams.  This was not because of any work done by the President, but by the work of our Representatives from the Valley that finally got enough support from  enough people in both parties to get this to the President despite Barbara Boxer.

One of the most telling examples of how Legislators view business owners is how they write regulations.  Almost all regulations start with the assumption that most employers are bad.  In fact, many times it is actually written into the introduction and states that this bill must be passed to protect the workers, etc.  The reality is that most employers work very hard with their employees to create a family atmosphere.  The regulations get in the way of much of this.  Every time the government mandates a benefit that many people are already doing for their employees, they add cumbersome requirements, and many pages of fines and penalties if you do not do it exactly right.  In a more practical world, doing your best should count for something, but not according to our Legislators.  So, every time they add a benefit, many employers remove another benefit so they can afford the one the government wants.  There is only one pot of money, but Legislators think employers can just invent more money like Congress does and it just isn’t the case.

If there is one takeaway from the recent Presidential elections is that middle-America and rural areas are tired of being ignored or shoved aside by our representatives.  If you don’t visit and really listen to their issues, you run the chance of being replaced.  Not all issues affecting business and employees can be handled by looking out the window in Los Angeles or Sacramento or Washington, D.C.  I hope they pay attention or 2018 could be a very turbulent year as well.

BUT THERE IS A RESPONSIBILITY OF THE OWNER\EMPLOYER AS WELL:

In 1999, in California, Governor Gray Davis signed the labor bills establishing daily as well as weekly overtime rules.  It also established a 30 minute employee meal with stern regulations.  Here we are 17 years later and there are still a number of employers who ignore, or do not know of these laws, or simply choose to go their own way.  This affects all of us.  When an employer does not follow the simple laws and refuses to do things like installing a time clock and paying people for the hours they work, they give every employer a black eye and give every Legislator an easy excuse to add new laws and regulations.  In other words, a few stubborn bad employers are making business hard for everyone else.  Instead of just complaining about the State or the Federal government, if  you know an employer that is not following the law, talk to them and let them know they are a big part of the problem.

The easiest way to pay people with the least amount of work on your part is to pay people exactly what they work based on a time clock.  Anything else you are doing is why we keep getting more “wage theft” headlines.  Let’s all resolve in 2017 to pay people for what they work and hold them accountable for the job.  Spend your hard time enforcing your rules instead of working hard to explain a poor payroll practice.  With minimum wages going up and other regulations coming to many States, 2017 is a good year to get on board the right train.  HR Mobile Services, Inc. is there to help you do it, but you have to follow the program to make it successful.

Have a Happy and Prosperous New Year!!!

AB 1066 PASSES ASSEMBLY, UPDATE! SIGNED BY GOVERNOR BROWN

(updated comments) The governor signed AB 1066 into law and already we are seeing some of the consequences of that action.  One point being discussed is the exemption on page 3 of the document that exempts employers with collective bargaining agreements.  This is actually true for all wage orders and many labor regulations.  However, it drives speculation that the UFW was behind this action to increase their shrinking ranks.  We shall see.

You can go on-line and read the entire Bill and all of the amendments  https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201520160AB1066  , but here is a short description:

First, presently Dairies, Ranch and farm labor are under wage order 14 in California.  If allows employees to work a 10 hour day or 60 hour workweek without overtime payment.  Now, beginning in 2019, employers with over 25 employees, will begin to work under new hourly rules.  Smaller employers with 25 or less employees, will start January 1, 2022.  It is a gradual reduction, but the numbers do not add up to a 6 day week anymore.  For instance, the first reduction is at 9 1/2 hours a day or 55 hours in a week.  Well, 6 days at 9 1/2 hours would be 57 hours for the week, so you would be into 2 hours of overtime or cut one of the days shorter.  This bad math continues on the rest of the reduction schedule until you are at 8 hours per day or 40 hours in a week which means employees will only work 5 days.

Here is what this will look like over the next few years:

 

AB1066

Change in Wage Order 14 to 8-hour work day

ALL DATES BEGIN ON JANUARY 1…….

EMPLOYERS w\ 25 OR LESS EMPLOYEES                                                                 EMPLOYERS w\ 26 OR MORE EMPLOYEES

2022 change to 9 ½ hours per day or 55 hours per week                             2019 change to 9 ½ hours per day or 55 hours per week

2023 change to 9 hours per day or 50 hours per week                                2020 change to 9 hours per day or 50 hours per week

2024 change to 8 1/2 hours per day or 45 hours per week                          2021 change to 8 1/2 hours per day or 45 hours per week

2025 change to 8 hours per day or 40 hours per week                                 2022 change to 8 hours per day or 40 hours per week

Further, beginning in 2022, there will be double time pay for all hours over 12 hours in a day.

Finally, I feel I must point out the math in this legislation.  It is tied to the minimum wage increases that are also being increased year after year until 2023 when all employers will be at $15 per hour and continue to increase thereafter.  Here is a little math for you:

If an employee makes $10 per hour now, and working 60 hours, they earn $600 per week.   When the new regulations are in place, an employee will make $15 per hour and work 40 hours and earn $600 per week.  So the employee is going to be no better off after a 50% increase in pay and the employer will be paying the same amount of money for  33% less productive work each week.  (this does not include increases in other employer required taxes and payments).  One other thing to note, you will no longer have to provide 30 hours of sick pay.  Under the new 8 hour day, you will only be required to provide 24 hours of sick pay benefits so the employee actually loses 6 hours of Paid Sick leave.

So, how does this law benefit the employee?  Well the employee will have more time to take a second job to increase their income.  However, the idea of this law was so employees had more “family” time.  Instead, they may be working more hours with a second job, likely not getting a day off at all and more tired and prone to being injured at work.  Not sure how any of this benefits the employee, but remember, all they told the farm workers was that they would be getting more overtime and didn’t mention their hours could be cut.

TWO NOTES OF WARNING!!

First, if you are not already, you really need to move toward paying an hourly rate.  You need to establish a time clock or other time keeping system, and log all hours worked.  Paying by the day, “salary” or other methods are going to get you in more trouble and could cost thousands of dollars.  You need to rely on HR Mobile Services, Inc. or your attorney to keep you out of trouble and follow their directions.

Second, be very careful of employees working at 2 locations that you are a partner or owner in.  For instance, if an employee works 5 days for you, they may want to work at another job.  They can work at another business that you are connected to under certain conditions

  • The other business must be completely separate with a it’s own FEIN number
  • It must be a separate payroll and a separate paycheck just like you get at any second job
  • You cannot be the person directing or encouraging the employee to work at the other job
  • Any disciplinary actions from one job cannot carry over to the other job

Understand that these 2 locations must be just like the employee is working at a dairy and a restaurant.  The can be in the same industry, but they have to be completely separated legally or you will be exposed as trying to circumvent the law and this could bring PAGA and other penalties in a Labor Commission hearing.

Please understand that there is plenty of time for changes, additions or other adjustments to this new law before it begins, so  pay attention to this space and to our mailings in the future.  WE WILL FIGURE THIS OUT TOGETHER!

 

 

CALIFORNIA DEFEATS OVERTIME BILL FOR AGRICULTURE AGAIN…..BUT…..

On Friday, there was a heated debate in Sacramento regarding a bill that would remove the exemptions for agriculture workers and bring them into the 8 hour day and 40 hour workweek.

First, a little history:

The Federal Government exempted agriculture workers back in the 1940’s from the FLSA and left the regulation of overtime to the States if they wanted to improve on this standard.  NO OTHER STATE DID…..EXCEPT CALIFORNIA.  In 1976 Jerry Brown (the first time as Governor), signed bills that established the 10 hour day and 60 hour work-week.  This was included in the Wage Orders that were established about 2001, specifically, Wage Order 14 with some agriculture work being moved to the 8/40 schedule with wage orders 8 and 13.

In 2010 and again in 2011, they tried to change the rules to 8/40 but it was defeated again with Governor Arnold Schwarzenegger stating:

“Unfortunately, this measure, while well-intended, will not
improve the lives of California’s agricultural workers and
instead will result in additional burdens on California
businesses, increased unemployment, and lower wages.  In order
to remain competitive against other states that do not have such
wage requirements, businesses will simply avoid paying overtime.
Instead of working 10-hour days, multiple crews will be hired
to work shorter shifts, resulting in lower take home pay for all
workers.  Businesses trying to compete under the new wage rules
may become unprofitable and go out of business, resulting in
further damage to our already fragile economy.”

So again on Friday, we had the arguments for and against.  3  pro-8/40 Assembly members felt it was important to quote Bible Scripture.  While interesting, this is not really the argument.  There were supporters from the usual groups, UFW, Labor leaders on one side and Agriculture employers on the other.  What was missing was those who really represent the interests of the employee.

Right now, a dairy worker generally works 60 hours a week, 10 hours a day.  If you pass this law, that employee will be working 40 hours a week, or 8 hours per day (5 days a week).  Since employers will not want to pay overtime, they will do one of 3 things.  They will change from two 10-hour shifts a day, to 3 8-hour shifts per day.  Or, they will reduce the size of their herds so they can be handled in 8 hours and this will further reduce the number of employees needed.  Finally, they can just close up and go to one of the other 49 states that want to work with agricultural employers.

When you reduce the worker’s income by 20 hours per week, you are not doing them a favor.  In fact, you may be creating a much worse situation.  In order to make up for the lost income (can you afford to lose $200 + per week in your pay?) the employee will have to look for a second income.  This means working at another dairy 2 days a week or working a second shift at another dairy.  This increases the likelihood of injuries due to being over tired, less time with family and most likely they will not have a day off at all.  Right now they get one or two days off a week, but if they have a second job, that will most likely go away.  YOU ARE NOT HELPING A PERSON WHEN YOU REDUCE THEIR HOURS, INCOME AND DAYS OFF.

Though well intentioned, this shows a real lack of understanding of the actual on the ground situation.  Typical of State Legislators, they sit in their Sacramento office and listen to advocates instead of getting their shoes dirty and talking to the actual people involved.  I would extend an invitation to any State Legislator to come and spend a day in our office to see the impact of some of their legislations.  I can guarantee there are at least 10 things that they do not know exist or the impact it has on employers and employees, and the environment.

Meanwhile, contact your representatives directly, not through an organization, and point out to them the tremendous loss to employees if this legislation goes through.  They won’t listen to your problems, but they may listen if you are discussing your employee’s concerns.