Labor & Employment Law

Overtime Rate MUST Include Bonuses and Commissions in Calculation

By James Peters

Employers, either through ignorance or intentionally, often make big mistakes in calculating overtime rates of pay for their employees and these often turn into big claims by the employees for unpaid wages later on.

Overtime Rate NOT Just 1.5 Times Hourly Rate

To calculate an employee’s “overtime rate” of pay, you first have to calculate their “regular rate” of pay, which is the number multiplied by 1.5 to get an “overtime rate”. 

Most employers do not include commissions, bonuses and other additional money an employer earns in calculating the employee’s “regular rate” for overtime purposes.  Employers usually just take the employee’s hourly rate, multiply it by 1.5 and use that as the overtime rate. 

However, under California law the “regular rate” is generally calculated by taking all of an employee’s regular wages (hourly pay, salary, bonuses, commissions, etc.) earned in a given week and dividing it by 40.  The overtime rate is then multiplied by 1.5.

This can make a very big difference in how much money an employee gets paid in overtime.

An Example

Assume a salesperson makes $24 per hour as a “base”, makes an additional $1,000 per week in commissions and works 20 hours of overtime each week.

This person’s employer most likely calculates his overtime pay by taking his hourly rate ($24) and multiplying it by 1.5 to arrive at an overtime rate of $36 per hour.  This equals $720 of overtime pay each week, or $37,440 per year.

What the employer should do is take the regular hourly pay for the week ($24 X 40 hours=$960) and add it to the commissions earned ($1,000) to arrive at the total weekly pay ($1,960).  This number should then be divided by 40 to arrive at a “regular rate” of $49.  This is multiplied by 1.5 for an overtime rate of $73.50 per hour.  This means the employee should be receiving $1,470 of overtime pay each week, or $76,440 per year.

So, each year this employer is getting away with paying the employee $39,000 less than he is legally entitled to!  Employees in California are entitled to recover up to four years of unpaid wages, which in this case equals roughly  $156,000.

Assuming there are ten such salespeople working for a company, this quickly adds up to over $1.5 Million over four years.

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Full post as published by California Employee Rights Blog on January 17, 2007 (boomark / email).