Under federal and California law, employers must include most bonuses and incentives in the “regular rate” for paying overtime, as well as meal and rest period premium pay. Often, such as with a monthly or quarterly bonus, an employer pays a bonus or incentive after paying overtime worked in the period that the additional payment covers. The employer then must recalculate the regular rate for overtime to factor in the bonus or incentive, followed by a “true-up” payment of additional overtime based on the now higher regular rate. That additional overtime amount then gets paid as a lump sum with wages for another pay period.  

In California, an employer must list such overtime “true-up” payments on an employee’s wage statement. But how? Is it enough just to list the category and amount? Or must an employer also list the rate and number of hours paid? The California Court of Appeal’s new decision in Meza v. Pacific Bell Telephone Co. resolved this issue: Listing only the overtime “true-up” amount is sufficient.

No “Rate” or “Hours” for Overtime “True-Up” Payment

In Meza, for straight time and overtime pay, the employer’s wage statements listed the “rate” and number of “hours” paid in those categories, as required. The employer also paid monthly incentives that had to be included in the regular rate for overtime purposes. It generally listed the amount of the incentives on the first wage statement in the month after employees earned them. The incentives appeared as “OVERTIME TRUE-UP PMT” with the amount, but without details on the “rate” or “hours.”

The Meza court recognized that the employer faced a common issue in having to recalculate overtime after the bonus amount earned for a period became known: “Because employees earned the bonus over the course of an entire month and the bonus amount was not known until the close of that month, there was no way to determine the overtime owed in relation to that bonus on a pay-period by pay-period basis.” Instead, the employer calculated the additional overtime owed after the close of the month, and reflected it on the wage statement for the pay period when it paid the overtime “true-up.”  

A former employee sued, contending that the wage statements violated the law by not including the rate and number of hours involved with the overtime true-up payment. For non-compliant wage statements in California, Labor Code section 226(e) imposes penalties of $50 per employee for the initial pay period with a violation, and $100 per employee for violations in subsequent pay periods, up to $4,000 per employee. The trial court certified the wage statement claim as a class action. Later, on the merits, it held that the wage statements complied with the law, dismissing that claim. The Court of Appeal affirmed.  

Labor Code section 226(a)(9) requires that wage statements list “all applicable hourly rates in effect during the pay period and the corresponding number of hours worked at each hourly rate by the employee.” The Court of Appeal rejected the plaintiff’s argument that this provision required the employer to list the rates and hours from overtime worked in prior pay periods underlying overtime true-up calculation. Finding the law “straightforward,” the Court of Appeal held that Labor Code section 226(a)(9) “is explicit” in only requiring a listing of hourly rates “during the pay period.” The relevant pay period, according to the court, was the current pay period that the wage statement covered, even though the employer paid the overtime true-up with the wage for that period. Because “none of the variables involved in the overtime true-up calculation, such as the hours worked,” related to that pay period, the wage statement did not have to include a list of hours and rates from earlier periods with respect to the additional overtime.

The court “refused to read a requirement that an employer includes hours and rates from prior pay periods,” when the Legislature omitted it. It added that such a requirement “is especially unwarranted here, where payment is not a simple matter of multiplying a pre-determined rate by overtime hours,” but rather “an after-the-fact calculation based in significant part on the amount of bonus the employee happened to earn the prior month.” Thus, based on the law’s plain language, the court concluded that employers do not need to list hours and rates next to an overtime true-up amount on wage statements.

Takeaways for Employers

This decision clarifies an issue that confronted California employers on how to reflect overtime true-up payments on wage statements. It is a reminder, however, of the complexities and potential exposure in trying to comply with California’s wage statement requirements. The case should serve as a reminder for employers to review compliance with wage statement rules, as well as to make sure that they correctly include bonuses and other items in the regular rate for paying overtime, meal and rest period premium pay, and any true-up payments.