Audit before the notice arrives
Regular Rate Audit Worksheet
Ferra and Alvarado Exposure
Why the regular rate matters.
The regular rate of compensation is the multiplier applied to every overtime hour, every meal period premium, and every rest period premium. A regular rate that is $2.00 too low compounds across every calculation. For an employee with 10 overtime hours per week and 2 missed meal periods per month, the underpayment per pay period is $20 (OT) + $4 (premiums) = $24. Over a one-year PAGA period, that is $624 per employee. For 50 employees, that is $31,200 — before penalties.
The two foundational cases.
Ferra v. Loews Hollywood Hotel (2021) 11 Cal.5th 858 held that meal and rest period premiums must be calculated at the regular rate — not the base hourly rate. Alvarado v. Dart Container (2018) 4 Cal.5th 542 held that flat-sum bonuses must be divided by only non-overtime hours when calculating the regular rate. Together, these decisions restructured how California employers must calculate virtually every wage-and-hour payment.
The regular rate includes all remuneration for employment except statutory exclusions. The most common error is excluding compensation that should be included.
Curable
Included: Non-Discretionary Bonuses
Production bonuses, attendance bonuses, performance bonuses, safety bonuses — any bonus paid pursuant to a prior agreement, policy, or promise. The key question is whether the employee had a reasonable expectation of receiving the bonus. If yes, it is non-discretionary and must be included.
Curable
Included: Flat-Sum Bonuses
Under Alvarado, flat-sum bonuses (fixed-amount bonuses not tied to hours) are divided by non-overtime hours only when calculating the regular rate. This produces a higher regular rate than dividing by total hours — which is the most common employer error.
Curable
Included: Commissions
Commissions earned during the pay period are included in the regular rate for that period. The timing question — when is the commission 'earned' vs. 'paid' — creates complexity. Under Sciborski, commissions are earned when the employee completes the work entitling them to the commission.
Curable
Included: Shift Differentials
Additional pay for working specific shifts (night shift, weekend shift) is included in the regular rate. The differential is added to the base rate for the hours worked at the premium shift.
Non-Curable
Excluded: Truly Discretionary Bonuses
Bonuses where both the fact of payment and the amount are at the employer's sole discretion, with no prior commitment, expectation, or pattern. These are rare. If the employer pays the same 'discretionary' bonus every quarter, it is not discretionary.
Non-Curable
Excluded: Gifts & Special Occasion Payments
Holiday gifts, birthday bonuses, and similar payments made as gifts — not as compensation for services. The payment must be a genuine gift, not an expected component of compensation.
The Alvarado methodology requires dividing the flat-sum bonus by only non-overtime hours worked in the pay period. Most payroll systems default to dividing by total hours — which understates the regular rate.
The divisor has a boundary, and so does the multiplier.
Alvarado's non-overtime-hours divisor governs flat-sum bonuses; commissions, piece-rate earnings, and production bonuses divide by total hours worked. And Alvarado fixed the multiplier as well as the divisor — the bonus's per-hour value is paid at 1.5× for each overtime hour, not the 0.5× federal half-time premium. Defense models that borrow the federal structure understate the delta threefold.
The compounding effect.
A $9.31 underpayment per pay period compounds to $242.06 per employee per year ($9.31 × 26 pay periods). For 50 employees, the annual wage underpayment is $12,103 — before PAGA penalties. Each underpaid pay period is also a wage statement violation (Naranjo) and potentially a waiting time violation for departed employees (§ 203).
Commissions create the most complex regular rate calculation because of timing mismatches between when commissions are earned and when they are paid.
Timing: When Are Commissions 'Earned'?
Sciborski rule
Under Sciborski v. Pacific Bell Directory (2012) 205 Cal.App.4th 1152, a commission is earned when the contractual conditions precedent are met — and the opinion expressly permits conditioning on the sale becoming final, including final payment received. The exposed seam is a condition unrelated to the sale, such as a forfeiture triggered by the employee's departure. For a car salesperson, the argument is that the work is complete at closing and a departure trigger takes the commission for a reason about the employee, not the sale — an untested but genuine theory.
Regular rate timing
For regular rate purposes, commissions should be allocated to the pay period in which they were earned. If a commission earned in January is paid in February, the January regular rate should include the commission — which means January overtime and premium calculations must be retroactively adjusted.
Practical approach
Most employers pay commissions monthly or quarterly and calculate the regular rate adjustment retrospectively. The adjustment multiplies the difference between the base OT rate and the commission-adjusted OT rate by all OT hours in the commission period.
Shift differentials are straightforward to include but frequently miscalculated when combined with overtime.
Common error.
The most common error is calculating overtime at the base rate without including the weighted differential. If the employee works OT during a night shift, the OT rate must reflect the weighted regular rate — not just the base rate × 1.5.
These are the most frequent regular rate errors identified in PAGA defense audits.
Non-Curable
Dividing Flat-Sum Bonus by Total Hours
The most common Alvarado error. The correct divisor is non-overtime hours only. Most payroll systems default to total hours. This requires a system configuration change, not just a policy update.
Non-Curable
Excluding Commissions from Regular Rate
Commission exclusion understates the regular rate for every overtime hour and every premium. The exposure compounds rapidly for sales-heavy workforces.
Potentially Curable
Premiums at Base Rate Instead of Regular Rate
The Ferra error. Payroll systems must be configured to calculate premiums at the full regular rate. This requires the system to know the regular rate before calculating the premium — a configuration many legacy systems do not support natively.
Potentially Curable
Ignoring Non-Discretionary Bonuses
Quarterly or annual bonuses that are expected (even if the amount varies) are non-discretionary and must be included. Retroactive adjustment is required when the bonus is paid.
Curable
Incorrect Overtime Tier Application
Applying weekly OT when daily OT should apply, or failing to apply the double-time rate after 12 daily hours. These are system configuration errors that can be corrected prospectively.
Curable
No Retroactive Adjustment for Late-Paid Commissions
When commissions paid in a later period should have been included in a prior period's regular rate, the OT and premium calculations for the prior period must be retroactively adjusted.
For illustrative and educational purposes only. Use the Regular Rate Calculator tool for interactive modeling. Calculations are illustrative — actual regular rates must be computed from employee-specific payroll data.