I was presenting to a terrific group of HR Directors at the LA Restaurant HR Association last week, and a question about California’s new paid sick leave requirements came up.
One sleeper provision of that new law requires that sick leave be paid at the employee’s “regular rate” and not the base hourly rate. Of note, the “regular rate” for sick leave purposes is not necessarily the same calculation as the “regular rate” for overtime purposes. For sick time, the rate is calculated by dividing the employee’s total wages (not including overtime) by the total hours worked in the full pay periods of the last 90 days before the sick pay is used. In contrast, the regular rate for overtime is calculated by dividing the total wages by the total hours worked in that work week. This nuance had the HR Directors scratching their heads as to how they were going to be compliant given that every hour of sick pay could technically be required to be paid at a different rate!
In trying to figure out a fix, we realized that this problem can be avoided. This nuance only becomes an issue if there are additional types of non-discretionary compensation paid to employees (such as commissions, piece rate pay, and service charges). Tips are discretionary and are not included in the overtime rate. But if the tips are automatic gratuities (aka service charges), they are non-discretionary and should be included in the regular rate for overtime. Many restaurants have already done away with this type of automatic gratuity and service charges for private parties, buy-outs and large parties, due to IRS changes in how such gratuities are taxed that took effect last year. In fact, I blogged on this issue and suggested that restaurants revisit this type of service charge to avoid certain taxes and to simplify overtime calculations.
What does this have to do with sick pay for restaurants? Well, the only real non-discretionary extra compensation a restaurant has is a service charge. If there are no service charges, and only discretionary tips/gratuities, then there is no “regular rate” issue to worry about either for overtime purposes or (starting in July) for paid sick leave. Therefore, yet another reason to revisit those private party contracts, banquet event order forms, private dining contracts, buyout contracts, bar menus for bottle service, and restaurant menus that still stay “a gratuity of 18% will be added for parties of 8 or more.” If not, get ready for a mega-migraine sized paid sick leave compliance headache.