“Encompasses all nondiscretionary payments, not just hourly wages.” That’s how the Supreme Court of California described the regular rate in 2021, holding that meal and rest period premiums must be calculated using the same regular rate as overtime. A promised bonus or shift differential left out of that rate shorts every overtime hour and premium in the pay period. Because the error sits in the payroll formula, it usually repeats for every employee who got the same payment, which is what can make it a class claim.
What is the regular rate, and why does it reach meal and rest premiums?
The regular rate is the hourly figure California uses to price overtime and premium pay. It isn’t the same as an employee’s base hourly wage. In Alvarado v. Dart Container Corp. of California (2018) 4 Cal.5th 542, the Supreme Court of California explained that the regular rate “can change from pay period to pay period” and “includes adjustments to the straight time rate, reflecting, among other things, shift differentials” and the per-hour value of nonhourly pay the employee earned.
Overtime under Labor Code section 510 is paid at a multiple of the “regular rate of pay.” Meal and rest period premiums under section 226.7(c), which also covers recovery periods, are “one additional hour of pay at the employee’s regular rate of compensation.” For years some employers read those as different phrases and paid premiums at base hourly wages. The hotel in Ferra v. Loews Hollywood Hotel, LLC (2021) 11 Cal.5th 858 did exactly that, paying premiums at the hourly wage and leaving out a bartender’s quarterly incentive payments. The court held that the “regular rate of compensation” in section 226.7(c) means the same thing as the regular rate of pay in section 510(a) and includes “not only hourly wages but all nondiscretionary payments for work performed by the employee.”
Ferra also refused to limit its ruling to the future. The court said that “In general, judicial decisions apply retroactively,” and it rejected the hotel’s request for prospective-only application. Alvarado did the same. For an employer that paid premiums at base rate before mid-2021, that means the exposure reaches back as far as the applicable claim periods allow.
How do you add a flat-sum bonus to the overtime rate?
Divide it by the nonovertime hours actually worked, and use 1.5 as the multiplier. That’s the rule from Alvarado, where a manufacturer paid hourly employees a flat $15 “attendance bonus” for completing a weekend shift. The employer spread the bonus over all hours worked, overtime included, and then added only a half-time premium. The court concluded that the flat-sum bonus at issue “should be factored into an employee’s regular rate of pay by dividing the amount of the bonus by the total number of nonovertime hours actually worked during the relevant pay period and using 1.5, not 0.5, as the multiplier for determining the employee’s overtime pay rate.”
Here’s a simplified example, assuming one week, a $20 base rate, 48 hours worked with 8 of them at time and a half, and a $50 flat bonus earned that week.
| Method | Bonus value per hour | Overtime pay for the week |
|---|---|---|
| Spread over all 48 hours, half-time premium (the method Alvarado rejected) | About $1.04 | About $244 |
| Divide by 40 nonovertime hours, 1.5 multiplier (Alvarado) | $1.25 | $255 |
The gap is about $11 for one employee in one week. Multiply it by every week a bonus was paid and every employee who earned one, then add the meal and rest premiums that were paid at the wrong rate, and the number gets large. Alvarado limited its holding to flat-sum bonuses comparable to the attendance bonus. The court noted that production or piecework bonuses and commissions “may increase in size in rough proportion to the number of hours worked, including overtime hours, and therefore a different analysis may be warranted.”
Alvarado also shows why federal guidance won’t settle a California claim. The employer argued its formula followed a federal regulation, 29 C.F.R. § 778.209. The court explained that “state law is controlling to the extent it is more protective of workers than federal law.”
Which pay components belong in the regular rate?
Anything the employee was promised in advance for work performed. Ferra adopted the state labor department’s definition of nondiscretionary payments: those owed “pursuant to [a] prior contract, agreement, or promise,” not “determined at the sole discretion of the employer,” as stated in the opinion. That line is where most regular rate disputes are fought.
| Pay component | In the regular rate? | Where the rule comes from |
|---|---|---|
| Hourly wage | Yes | Alvarado, Ferra |
| Shift differential | Yes | Alvarado (quoted in Ferra) |
| Flat-sum bonus promised in advance (attendance, shift completion) | Yes, divided by nonovertime hours with a 1.5 multiplier | Alvarado |
| Nondiscretionary incentive payment | Yes, for overtime and for meal and rest premiums | Ferra |
| Production, piecework, or commission pay | Yes, but Alvarado‘s divisor may not apply | Alvarado, footnote 5 |
| Bonus where both whether to pay and how much are left to the employer’s sole discretion, with no prior promise | Not under Ferra‘s definition of nondiscretionary pay | Ferra |
I’d treat the last row with caution. Calling a payment a “discretionary bonus” or a “gift” in the payroll system doesn’t make it one. If a prior contract, agreement, or promise led the employee to expect it, a court may find it was nondiscretionary.
How does a bonus error become a class action?
Through the pay codes. In Martinez v. Sierra Lifestar, Inc. (Apr. 21, 2026, F089576), a published Fifth District opinion, an ambulance company’s time and pay data showed 10 types of bonuses, and the former employee alleged the company left them out of the regular rate for about 135 workers. The plaintiff had received only one bonus, once. The trial court denied class certification because his claim wasn’t typical of the rest.
The Court of Appeal reversed. It held that the company’s arguments that the bonus “was in the nature of a gift, was discretionary, or both, are not unique to Martinez,” because “Those arguments apply to all EMS Bonuses paid to Lifestar’s other employees for National Emergency Medical Services Week,” according to the opinion. The court sent the case back and noted that the trial court could consider “whether to narrow the proposed class or whether to create subclasses for one or more types of bonuses.” The complaint in Martinez also pleaded wage statement, final pay, and Private Attorneys General Act (PAGA) claims built on the same omission. PAGA claims seek civil penalties for Labor Code violations.
There’s a lesson in that for defense strategy. A defense that applies to everyone who got the same bonus isn’t unique to the named plaintiff, so under Martinez it doesn’t defeat typicality. The better defense work happens before the claim: deciding in writing, before a bonus is paid, whether it’s discretionary, and documenting that decision. After a claim arrives, in my view the arguments that matter most at certification are the ones that differ by bonus type, location, or pay period. Martinez itself noted that the trial court could consider narrowing the class or creating subclasses by bonus type.
What should an employer do about regular rate exposure now?
Start with the payroll formula, because that’s what the plaintiff’s expert will start with. In Martinez, the employee’s expert used the company’s own time and pay data to identify the roughly 135 class members and the bonuses they were paid. When a demand letter, PAGA notice, or class complaint arrives:
- Put a litigation hold on payroll registers, pay-code tables, bonus plan documents and announcements, timekeeping data, wage statements, and the payroll vendor’s configuration for overtime and premium calculations.
- Calendar the response deadline on the notice or summons, and check for an arbitration agreement and an employment practices liability (EPLI) policy with notice terms.
- Identify the payroll and HR staff who set up each pay code and approved each bonus, and make sure no one takes action against the employee that could look like retaliation.
- List every pay code paid to nonexempt employees, mark which ones fed into the overtime and premium rate, and pull the documents showing whether each bonus was promised in advance.
- Talk to a lawyer before responding, contacting the employee or the employee’s lawyer, or offering anything to settle.
The firm’s California wage and hour defense page explains how it reviews overtime and wage statement disputes.
Regular rate questions from California employers
Do meal and rest premiums paid at base rate before July 2021 still create exposure?
They can. Ferra applied its holding retroactively, so premiums paid at the base hourly wage before July 2021 to employees who also earned nondiscretionary pay may have been underpaid. How far back a claim reaches depends on the claims pleaded and the time limits that apply to each. Recalculating past premiums with counsel before a claim arrives helps size the exposure.
Does a holiday or year-end bonus count?
It depends on how it was decided and announced. Under Ferra‘s definition, a payment owed under a “prior contract, agreement, or promise” is nondiscretionary and belongs in the regular rate. Under the federal regulation Ferra cited, a payment is discretionary only if “both the fact that payment is to be made and the amount of the payment are determined at the sole discretion of the employer,” so a bonus paid under a set formula is hard to call discretionary even if paying it was optional. In Martinez, the employer’s own testimony and pay records shaped the certification ruling.
Can the regular rate be different every pay period?
Yes. Alvarado described it as “a weighted average reflecting work done at varying times, under varying circumstances, and at varying rates.” An employee who works shifts at different rates, or earns a bonus in some pay periods and not others, can have a different regular rate from one pay period to the next. In my view, payroll systems that use a single stored rate for overtime are a common source of these errors.
Is following the federal FLSA formula enough?
Not in California. Alvarado rejected the employer’s federal method for flat-sum bonuses and explained that state law controls where it’s more protective of workers. California also requires daily overtime, which federal law doesn’t.
If an employee’s lawyer says your overtime rate left out bonuses
If your company has received a demand, PAGA notice, or class complaint claiming bonuses or differentials were left out of the regular rate, the pay-code setup and the bonus documents usually decide how much of the claim is real. Rosenberger + Kawabata represents employers defending employment lawsuits and claims through its business litigation practice, including claims involving overtime and premium pay calculations. Contact Rosenberger + Kawabata online for a confidential consultation, or call (310) 894-6921.
Sources
The Supreme Court of California decisions are Ferra v. Loews Hollywood Hotel, LLC (2021) 11 Cal.5th 858 and Alvarado v. Dart Container Corp. of California (2018) 4 Cal.5th 542. The class certification opinion is Martinez v. Sierra Lifestar, Inc. (Apr. 21, 2026, F089576), Court of Appeal, Fifth Appellate District, certified for publication.
This post is general information about California and federal employment law as of November 5, 2026. It is not legal advice, and reading it does not create an attorney-client relationship. Employment statutes, regulations, and court decisions change often, and the outcome of any claim depends on its facts. Past results do not guarantee future outcomes.