Calif. Employers Not Required to Calculate Overtime Using Weighted Average

Calculating employees' regular rate of pay for overtime purposes can be complicated when workers receive different rates of pay in a single pay period. A California appeals court recently said employers did not violate state law by using the rate-in-effect method rather than the weighted-average method.

The appeals court first noted that California law generally requires that nonexempt employees be paid 1.5 times their regular rate of pay for work performed beyond 40 hours in a week or eight hours in a day—and twice their regular rate of pay for time worked in excess of 12 hours in a day or eight hours on the seventh day of the workweek.

While "regular rate of pay" is not expressly defined in the California Labor Code, the court noted, the figure is usually obvious when an employee is paid the same rate for all work in the week.

However, when the employee works at two or more different rates of pay during a single pay period, it is harder for the employer to calculate the overtime rate, the court said.

Employers typically use the weighted-average method to calculate the overtime rate for so-called dual-rate employees, which has been endorsed by the California Division of Labor Standards Enforcement (DLSE).  

According to the California Labor Commissioner's Office, the hourly rate is calculated under the weighted-average method by dividing the employee's total earnings for the workweek, including overtime earnings, by the total hours worked during the workweek, including the overtime hours.

Under the rate-in-effect method, which was used by the employers in this case, workers are paid overtime at the rate in effect when the overtime hours begin.

Which Method Most Benefits Employees?

The plaintiffs were employees of Buffalo Wild Wings Restaurants owned or operated by the defendants. They alleged that the defendants underpaid dual-rate employees for overtime hours.

At trial, both the plaintiffs' expert and the defendants' expert testified that the two plaintiffs who received different rates of regular pay received greater overtime pay under the rate-in-effect method than they would have received under the weighted-average method.

The trial court then concluded the following:

• There is no binding state or federal law requiring the use of a particular method of calculating overtime in dual-rate workweeks.
• The DLSE manual's adoption of the weighted-average method is not binding because it reflects no expertise and special competence with the problem at issue.
• California law requires employers to use a method of compensation that is most economically beneficial to the group of employees at issue.
• The plaintiffs failed to prove that use of the weighted-average method would have better protected the defendants' dual-rate employees. The undisputed evidence demonstrated that use of the rate-in-effect method produced greater economic benefit to dual-rate employees as a whole over the relevant time period.

The trial court dismissed the overtime claim. The plaintiffs appealed.

The appeals court affirmed the trial court's decision. The court ruled that the defendants did not violate California law by using the rate-in-effect method.

California law, the court said, does not mandate the use of the weighted-average method, and defendants' dual-rate employees, including the plaintiffs, overall received net greater overtime pay under the rate-in-effect method than they would have received under the weighted-average method.

Furthermore, the court said, the employer was not bound to follow the DLSE manual, which endorsed the weighted-average method for calculating the regular rate of pay for dual-rate employees.

Therefore, the trial court correctly dismissed the overtime claim, the court said.

The appeals court did say, however, that it was not deciding what method employers must always use to calculate overtime payment for employees who work at different rates of pay during a single pay period. It noted it was only holding that, under the particular facts of this case, the defendants' use of the rate-in-effect method was lawful.

Levanoff v. Dragas, Calif. Ct. App. Nos. G058480, G058709 (June 25, 2021).

Professional Pointer: This decision clearly does not approve of the use of the rate-in-effect method in all cases. Had the use of this method resulted in the employer's dual-rate employees receiving less in overtime compensation than they would have received if the weighted-average method had been used, it is likely that both the trial court and the appeals court would have disallowed the use of the rate-in-effect method.

Joanne Deschenaux, J.D., is a freelance writer in Annapolis, Md.