Overtime and Bonuses – How to Calculate in California
Calculating overtime on bonuses in California can be a bit complex because California labor laws have specific rules regarding how overtime should be calculated when bonuses are involved. In California, overtime is typically calculated based on the regular rate of pay, which includes not only the base hourly wage but also certain types of bonuses and other supplemental pay.
Here’s how you can calculate overtime on bonuses in California:
There are generally two types of bonuses or supplemental pay — discretionary bonuses and non-discretionary bonuses, which the Department of Industrial Relations (DIR) defines as follows:
- A discretionary bonus is generally “in the form of a gratuity where there is no promise for their payment, for example, a holiday bonus at the end of the year, or quarterly/annual bonuses based on overall company profit.
- A non-discretionary bonus “may be a contractually required payment where a promise is made that a bonus will be paid in return for a specific result, such as exceeding a minimum sales figure or piece quota, or as an inducement to remain in the employ of the employer for a certain period of time.”
With a discretionary bonus, the supplemental pay is not tied to a specific performance task, so there is no need to factor that bonus into an employee’s regular rate of pay.
A non-discretionary bonus will need to be factored into an employee’s regular rate of pay, and thus will affect other pay items such as overtime and missed meal break violations.
Determine the Regular Rate of Pay:
Once the regular rate of pay has been calculated, that rate of pay is used to determine the overtime premium rate. This premium rate is paid on the overtime hours worked for the period. To calculate the regular rate of pay, see the calculation below:
Divide the total by the total number of hours worked during the pay period, by the total pay amount, to get the regular rate of pay. For example, if an employee worked 44 hours at $20 an hour, and made $250 in supplemental pay, here is the calculation:
($20 x 44 hours = $880) + ($250 bonus) = $1130.00
$1130.00 / 44 = $25.68 (regular rate of pay)
$25.68 / 2 = $12.84 (overtime premium rate)
$12.84 X 4 hrs overtime = $51.36 (overtime premium pay)
In this scenario, the employee’s total pay would be $1130.00 + $51.36 = $1181.36.
This all looks very confusing! But don’t worry, our payroll system will do this calculation for you on a per pay period basis. For longer periods it will require a manual calculation, where we can help you create a spreadsheet to make it easy. Just be sure to let your payroll rep know you have non-discretionary bonuses and feature can be turned on or we can provide you with other resources.
If you have any questions about this or any other payroll or HR issue, please don’t hesitate to contact the experts at Infinium Payroll and HR.
Bonus Extra!
What is Not Included in Regular Rate of Pay?
The following payments are not included in the regular rate of pay:
- Gifts, such as those received for holidays or birthdays or as a reward for service, the amounts of which are not based on hours worked, production or efficiency
- Hours paid but not worked, such as vacation, holidays, sick leave, reporting time, split shift pay and extra hour premium pay for failure to provide meal or rest breaks
- Reimbursement of expenses
- Discretionary bonuses, which are typically awarded in recognition of services performed during a given period. These bonuses occur at your sole discretion. You decide the bonus amount and timing of the payment
- Profit-sharing plans, which are payments made in recognition of services performed during a given period to a profit-sharing plan or trust or bona fide thrift or savings plan, without regard to hours of work, production or efficiency
- Employee Retirement Income Security Act (ERISA) plan payments, such as irrevocable contributions for old age; retirement; life, accident or health insurance; or similar employee benefits
- Overtime premium pay