Extra Per Day Pay and the Proper Rate of Pay for Overtime Work

Both California law under Cal. Labor Code § 510, and the federal Fair Labor Standards Act of 1938, 29 U.S.C. (United States Code) 201, et seq. (“FLSA”), hold that overtime compensation is based on a rate of no less than one and one-half times the employee’s “regular rate of pay.” Your “regular rate of pay” is the compensation you normally earn for the work you perform for your employer. It may come as a surprise for some that while the “regular rate of pay” is an hourly rate, it is not necessarily the hourly rate you were offered when you were hired or the hourly rate stated when you received with your last pay raise or the amount you are payed for an hour of regular (non-overtime) work performed.

California has adopted the definition of “regular rate of pay” set out in the FLSA. The Division of Labor Standards Enforcement (“DLSE”) Enforcement Policies and Interpretations Manual, § 49.1.2. According to the FLSA, the regular rate includes “all remuneration [compensation] for employment paid to, or on behalf of, the employee...” 29 U.S.C. § 207(e). The regular rate includes most forms of pay that you receive. The regular rate includes (i) your hourly earnings, (ii) bonuses based on a predetermined formula (non-discretionary), and (iii) the value of meals and lodging provided by your employer.

This how it works. For example, an employee works for a hourly rate of $25 and she is paid on a weekly basis, which is the pay rate and pay period she was offered when she was hired. On a particular workweek, the employee works 45 hours. Because in California all work over 8 hours in a workday or 40 hours in a workweek must be paid at an overtime rate, the employee has worked 40 regular hours and 5 overtime hours. On this particular week, the employee also earns a $100 non-discretionary bonus for having been employed with the company for six months. At what rate should the employee be paid for those 5 hours of overtime? The answer is not as simple as merely multiplying the employee’s hourly rate of $25 per hour x 1.5. Rather, to determine the employee’s “regular rate of pay,” the $100 bonus must first be included in the calculation. The employee’s “regular rate of pay” is calculated by as follows: 40 regular hours worked during the workweek x $25 per hour = $ 1,000. The employee’s $100 bonus is then added: $1,000 + $100 = $1,100. Dividing $1,100 by 40 (the regular hours worked that workweek) = $27.50. Thus, the employee’s “regular rate of pay” for this particular week is $27.50, not the $25 hourly rate referenced at the time of hiring. The amount of overtime pay is then calculated as follows: $27.50 (regular rate of pay) x 1.5 x 5 overtime hours = $ 206.25 overtime pay. (Note: If the employer had calculated the employee’s overtime based on the incorrect regular rate of $25 per hour, the employee would have been underpaid for overtime work in the amount of $18.75 ($206.25 (correct overtime pay) - $187.50 incorrect overtime pay [$25 (incorrect regular rate of pay) x 1.5 x 5 overtime hours = $187.50 incorrect overtime pay].)

While the “regular rate of pay” includes most forms of pay that you receive in addition to your stated hourly wage, there are exceptions under the FLSA. This includes “reasonable payments for traveling expenses, or other expenses, incurred by an employee in the furtherance of his employer’s interests and properly reimbursable by the employer; and other similar payments to an employee which are not made as compensation for his hours of employment” 29 U.S.C. § 207(e). Thus, if an employer pays the employee for travel expenses or other expenses actually incurred by the employee in the course of his employment, these payments are not considered compensation and do not need to be included in the employee’s “regular rate of pay” for the purpose of calculating the proper pay rate for overtime hours worked.

An issue does arise when an employer provides an employee with extra pay, at a standard per day or per week pay rate, intended to cover housing or travel costs the employee incurs while working away from home or the usual workplace. Of course, paying a standard rate to cover expenses incurred by employees is a convenient way administratively for the employer to pay employees for their expenses. Not requiring employees to keep track of expenses and report the expenses to the employer simplifies the employer’s payroll tasks. However, what is convenient for the employer is not necessarily lawful.

Whether the employer labels this extra pay as a reimbursement, an allowance, a stipend, or a per diem is not controlling in determining if the extra pay must be included in calculating overtime pay. Employers often assume, or lead employees to believe, that such extra pay at a standard per day pay rate is not compensation and thus the employer does not need to include the extra pay in the employee’s “regular rate of pay” for purposes of calculating overtime compensation. Depending on the circumstances, these payments to the employee may in fact represent compensation that must be included in calculating overtime compensation. This is particularly the case when the daily payments do not correlate to actual housing or travel costs incurred by the employee.

The Ninth Circuit Court of Appeals in Clarke v. AMN Services LLC, Case No. 19-55784 (9th Cir., Feb. 8, 2021) recently held that extra per day (per diem) payments made to nurses and technicians (who worked at facilities more than 50 miles from their homes) that varied depending on how much they worked were part of the workers’ “regular rate of pay” under the FLSA and California law. The defendant, a healthcare staffing company, would deduct a portion of the per diems paid to employees when they missed shifts or a portion of their shifts. The defendant also paid an amount equal to the per diems to employees who did not travel but, unlike with travelling employees, these amounts were included as part of the employees’ wages. The Ninth Circuit held that the per diem payments actually functioned as work compensation, similar to bonuses for good attendance, rather than reimbursement to employees for reasonable expenses incurred on workdays spent more than 50 miles from home. Hence, these payments should have been included in the employees’ “regular rate of pay” for determining the correct rate for overtime pay.

The court determined that the payments were part of the employees’ pay package and functioned as supplemental wages based on a combination of factors, including: (1) “the tie of the per diem deductions to shifts not worked regardless of the reason for not working”; (2) a system whereby “banked hours” accumulated on days for which employees were already paid a per diem could transform a subsequent “personal’ day when they were not working into a day for which the employer must pay a per diem payment; (3) “the default payment of per diem on a weekly basis, including for days not worked away from home, without regard to whether any expenses were actually incurred on a given day;” (4) “and the payment of per diem in the same amount, but as acknowledged wages, to local clinicians who did not travel.”

In Newman v. Advanced Tech. Innovation Corp. (1st Cir. 2014) 749 F.3d 33, employees (engineers) had employment agreements that set both an hourly wage and a weekly per diem payment based on hours worked. The employees sued arguing that the per diem payments operated as an hourly wage and should count as part of the regular rate for purposes of calculating overtime pay. The First Circuit Court of Appeals agreed, concluding that the employer “impermissibly” reduced the employees’ regular wages by labeling part of their compensation as a “per diem;” this is because reductions to those payments were based “on the exact number of hours worked in the week.”

Bottom line: extra per day payments that are not tied to actual expenses the employee incurs in the course of employment act as supplemental compensation that must be included in the employee’s “regular rate of pay” for the purposes of calculating overtime pay. When an employer fails to include these payments in the “regular rate of pay,” the employer underpays the employee for overtime wages earned and violates California law.

If you believe you have not been paid proper overtime wages, contact the leading lawyers in California for overtime compensation at Kokozian Law Firm, APC. Ask about our free initial consultation.