California law generally requires that non-exempt employees be paid 1.5 times their “regular rate of pay” for work performed beyond 40 hours in a week or 8 hours in a day – and twice their “regular rate of pay” for time worked in excess of 12 hours in day or beyond 8 hours on the seventh day of the workweek.
While “regular rate of pay” is not expressly defined in the California Labor Code, there should be few questions about what that rate is when an employee works at the same rate during the workweek.
But when an employee works at two (or more) different rates of pay during a single pay period, how does the employer calculate the overtime rate?
Employers typically use the “weighted average” method to calculate the overtime rate for such “dual-rate employees.” Under that method, which has been endorsed by the California Division of Labor Standards Enforcement (“DLSE”), the hourly rate is calculated by adding all hours worked by the dual-rate employee in the pay period and dividing that number by the total compensation for that period.
But is that the only method that can be used in California?
In Levanoff v. Dragas, the California Court of Appeal affirmed the trial court’s decertification of a subclass for dual rate overtime violations, and it approved the dismissal of a Private Attorneys General Act (“PAGA”) dual rate claim, both of which alleged that Buffalo Wild Wings violated the law by not using the “weighted average” method. Instead, the Court approved the use of a different method used to calculate the overtime rate for Buffalo Wild Wings employees – the “rate-in-effect” method, by which employees are paid overtime at the rate in effect when the overtime hours begin.
The “rate-in-effect” method is approved under federal law in some circumstances.
The Court of Appeal concluded that the DLSE’s adoption of the “weighted average” method is not binding upon it, and that it therefore was not bound to accept the “weighted average” method as the exclusive method to calculate overtime rates.
Addressing the use of the “rate-in-effect” method, the Court looked at both the face of the policy and the net effect of that approach, analogizing it to the use of a time-rounding policy.
The Court concluded that the “rate-in-effect” policy was neutral on its face. And the Court concluded that the use of the “rate-in-effect” method actually resulted in Buffalo Wild Wings employees overall receiving more overtime pay than they would have received under the “weighted average” method.
The Court’s decision, however, is limited to the facts. Indeed, the Court expressly stated that it was not addressing the overtime calculation method employers must “always” use, but instead was addressing whether the use of the “rate-in-effect” method was lawful “under the facts of the case.”
For that reason, the decision cannot be read to approve of the “rate-in-effect” method in all cases. In fact, had the “rate-in-effect” approach worked to the detriment of the Buffalo Wild Wings employees, it would appear that both the trial court and the Court of Appeal would have reached the opposite conclusion.
Accordingly, before California employers adopt the “rate-in-effect” method, they would be wise to determine whether or not it would work to the detriment of employees.