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California Law Allows The “Rate-In-Effect” Method To Calculate The Regular Rate Of Pay
In 2011, a group of employees from several Buffalo Wild Wings franchises sued the owners of their restaurants for violations of California wage and hour law on behalf of themselves and others. The employees were employed in various capacities, including server, bartender, certified trainer, manager-in-training, and shift lead.
In 2014, the trial court partially granted the employees’ motion for class certification and certified multiple classes and subclasses. One such subclass, the dual-rate overtime subclass, alleged the owners paid certain employees different rates of pay for performing the same type of work during the same pay period and, as a result, underpaid certain employees for overtime work. Specifically, these employees asserted that the owners violated Labor Code sections 510 and 1194 by using the “rate-in-effect method” instead of the “weighted average method” for calculating the regular rates of pay for dual-rate employees.
Labor Code section 510 requires that employees be compensated at a rate of no less than 1.5 times the employee’s regular rate of pay for all work in excess of eight hours in one workday and 40 hours in any one workweek. When an employee works at two different pay rates rather than a fixed rate during a single workweek, employers must calculate the regular rate of pay based on both rates. For these dual-rate employees, two methods for calculating the regular rate of pay have been developed: the weighted average method and the rate-in-effect method.
The weighted average method adds all hours worked in the week and divides that number into the total compensation for the week. Under the rate-in-effect method, the regular rate of pay is the hourly rate in effect at the time the overtime hours begin. The rate-in-effect method has the added benefit of being a simpler method for computing overtime pay. However, California’s Division of Labor Standards Enforcement (DLSE) Manual has endorsed the weighted average method.
While the trial court initially certified multiple classes and subclasses, it ultimately decertified all classes but the dual-rate overtime subclass. In a separate trial related to another portion of employees’ claims, the trial court ruled in favor of the owners, finding that: 1) the employees failed to exhaust the necessary administrative remedies; 2) their dual-rate claim was barred by the statute of limitations; 3) they failed to prove that owners’ use of a rate-in-effect method to calculate overtime in dual rate workweeks violated any labor law; and 4) even if the owners did violate the law by using the rate-in-effect method to calculate overtime, the impact on the employees was negligible. Based on the trial court’s ruling, the owners moved to decertify the dual-rate overtime subclass, and the trial court granted the motion. The parties also stipulated to dismiss the employees’ other claims under the Private Attorney’s General Act (PAGA) so that only the individual claims remained. The employees appealed.
On appeal, the appellate court noted that the trial court gave a single reason for decertification of the dual-rate overtime subclass: the employees, who had proposed the separate trial in the first place, were bound by the trial court’s finding that the owners did not violate any law by using the rate-in-effect method of calculating the overtime rate. The appellate court agreed, finding that although the DLSE Manual has endorsed the weighted average method, the statements in the DLSE Manual are not binding. Further, the court noted that while a California Supreme Court case cited the weighted average method, the issues, in that case, were different. In summary, California law did not make the weighted average method the exclusive method for calculating the regular rate of pay for dual-rate employees.
In addition, the court noted that by using the rate-in-effect method for calculating the regular rate of pay, the owners conferred a net benefit on dual-rate employees. For example, the employees’ expert testified that one of the dual-rate employees worked seven dual-rate periods. Of those seven periods, one resulted in the employee receiving 98 cents less overtime pay than he would have received using the weighted average method, and six periods resulted in a total of $34.31 more overtime pay. Thus, the employee received $33.33 more overtime pay due to the owners’ use of the rate-in-effect method. The employees’ expert also determined that in total, the employees were paid $2,065.74 more because the owners had used the rate-in-effect method instead of the weighted average method. Thus, the court concluded that imposing penalties of any amount against the owners would be unjust.
Accordingly, the court affirmed the trial court’s decision and determined that the owners did not violate California employment law.
Levanoff v. Dragas, 65 Cal. App. 5th 1079 (2021).
This case interpreted California wage and hour law, which generally applies to private employers. The federal law – the Fair Labor Standards Act (FLSA) – generally applies to public educational entities. Under the FLSA, when an employee has more than one rate of pay, the regular rate of pay is “the weighted average of such rates.” However, the FLSA allows the rate-in-effect method if the overtime compensation was paid pursuant to an agreement or understanding arrived at between the employer and the employee in advance of the performance of the work.