Overtime pyramiding is the (often mistaken) practice of counting the same hours against two different overtime limits. The most common example of overtime pyramiding is using hours that have been counted against daily overtime to calculate a weekly overtime limit. This is especially common because daily overtime is usually a state level requirement (i.e. California Labor Code) and weekly overtime is a federal requirement (i.e. Federal Labor Standards Act).
In almost every case pyramiding overtime is not the correct way of calculating overtime. Pyramiding happens when an employer mistakenly counts toward weekly overtime those hours already paid out at time and a half or double time due to daily overtime obligations. The result is the employee receives a few additional hours of overtime premium pay per pay period to which they were not entitled.
For a small office, such is not a big deal. However, for larger organizations with many individuals working overtime this could be a substantial sum of money.
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To avoid the “pyramiding” problem keep in mind that only hours paid out at the employee’s regular rate of pay count toward the 40-hour weekly overtime trigger. Those hours already paid out as daily overtime do not count to the 40-hours. An employer is not required to let daily overtime hours do what essentially amounts to “double duty” and apply to the weekly overtime calculation as well.
California overtime law explicitly provides that overtime pay should not be duplicated or “pyramided” under the daily and weekly overtime provisions. To avoid pyramiding or duplication of overtime pay for the same hours of work, California provides that the employee must be paid overtime for all hours in the workweek in excess of the applicable daily maximum or in excess of the applicable weekly maximum, whichever the number of hours is greater. Basically, there is no “pyramiding” of separate forms of overtime pay for the same hours worked. Once an hour worked is paid at the applicable daily overtime rate, that same hour cannot be used in the computation of forty hours for the purposes of weekly overtime pay.
In enacting Labor Code section 510, the California Legislature expressly prohibited requiring an employer to “pyramid,” or pile premium compensation on top of premium compensation. Labor Code section 510 (a) provides in relevant part: “Nothing in this section requires an employer to combine more than one rate of overtime compensation in order to calculate the amount to be paid to an employee for any hour of overtime work.”
California courts have also held that an employer is not required to combine more than one rate of overtime compensation to determine the amount to be paid for any hour of overtime work. (DeYoung v. City of San Diego (1983) 147 Cal.App.3d 11, 18-19; Koebke v. Benardo Heights Country Club (2005) 36 Cal.4th 824, 840.; People v. Giordano (2007) 42 Cal.4th 644, 659.) For example, in Monzon v. Schaefer Ambulance Service, Inc. (1990) 224 Cal.App.3d 16, the court discussed whether pyramiding overtime compensation is permitted under Industrial Welfare Commission wage orders relating to overtime compensation. The issue was how to calculate overtime when an employee worked both more than 8 hours in a day and more than 40 hours in a week. The Court reached the same result as the Legislature required in Labor Code section 510, holding that “the proper method to use in calculating overtime is one in which the employer must identify at week’s end all hours worked by an employee during that workweek and pay overtime based upon the excess of total hours over the greater of either: (1) eight hours in a workday, including double time, or (2) forty hours in a workweek.” (Id. )
Furthermore, the Division of Labor Standards and Enforcement (DLSE) within the California Department of Industrial Relations (DIR) – charged with administration and enforcement of wage orders – also takes a position that there is no “pyramiding” of separate forms of overtime pay for the same hours worked.
December 23, 1999 Memorandum entitled, “Understanding AB 60: An In Depth Look at the Provisions of the “Eight Hour Day Restoration and Workplace Flexibility Act of 1999“:

[O]nce an hour is counted as an overtime hour under some form of overtime, it cannot be counted as an hour worked for the purpose of another form of overtime. When an employee works ten hours in one day, the two daily overtime hours cannot also be counted as hours worked for the purpose of weekly overtime.

January 19, 200 Memorandum entitled, “AB-60 Overtime Requirements: No Pyramiding of Overtime Hours“:

Your letter poses a question about calculating overtime for an employee who works 10 hours per day, five days in a work week… On each work day, the employee is entitled to two hours of daily overtime pay, and these daily overtime hours would not be counted for the purpose of any other overtime payment, such as weekly overtime hours.

That being said, the above just describes the default, minimal requirements under California law. An employee (or union) could certainly negotiate a better deal with more lucrative overtime premiums.