March 7, 2018 California Supreme Court Clarifies Required Method for Calculating Overtime on Non-Discretionary Flat-rate Bonuses

Earlier this week, the California Supreme Court issued an opinion in Alvarado v. Dart Container Corporation of California, holding that when an employee has earned a flat sum bonus during a single pay period, the employer must calculate the employee’s overtime pay rate using only the regular non-overtime hours worked by the employee during the pay period, not the total hours worked.

Analysis

When calculating overtime pay due to non-exempt employees, the employer is required to base the calculation on the employee’s “regular rate of pay,” which must include non-discretionary bonus payments.  (Whether a bonus is “non-discretionary” is the subject of detailed regulations.) In this case, Dart Container paid a $15 “attendance bonus” to employees who worked on a Saturday or Sunday.  For employees who worked overtime during a pay period in which they received an attendance bonus, the company calculated overtime on the bonus by dividing the bonus by the total number of hours worked in the pay period (both non-overtime and overtime hours). The company then used a multiplier of 0.5 to determine the amount the bonus added to the employee’s hourly overtime pay. The employee contended the employer’s method of calculating overtime was illegal because the company should have divided the bonus only by the number of non-overtime hours worked during the pay period, and should have applied a multiplier of 1.5.  The employer argued that its method of calculating the overtime rate was proper because it complied with the federal Fair Labor Standards Act (“FLSA”), which permits an employer to divide a bonus by total hours worked and apply a 0.5 multiplier.

The Court of Appeal agreed with the employer, and held its method of calculating overtime was permitted under California law. The California Supreme Court reversed. It reasoned that because California’s state policy is to discourage overtime, the method used by an employer must not encourage the use of overtime. The FLSA formula does just that, because every hour of overtime worked incrementally decreases the regular rate, thereby incentivizing employers to require their employees to work more overtime. Based on this reasoning, the court held that only the non-overtime hours the employee actually works in a pay period should be the divisor, rather than all the potential full-time non-overtime hours in a pay period, and that the proper multiplier for the bonus premium is 1.5, not 0.5:  “We conclude that the flat sum bonus at issue here should be factored into an employee’s regular rate of pay by dividing the amount of the bonus by the total number of non-overtime 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.”

What This Means For Employers

This decision firmly establishes the method employers must use to calculate a California employee’s overtime pay rate when the employee has earned a flat sum bonus during a single pay period. Additionally, because the same policy consideration of discouraging overtime applies to other types of bonuses, the California Supreme Court’s reasoning very likely applies to bonuses that cover multiple pay periods, such as annual non-discretionary bonuses. Employers should immediately review their payroll policies and practices to ensure their California employees receive overtime pay calculated in a manner consistent with this opinion.

This E-Update was authored by Paul Batcher.  For more information, please contact Mr. Batcher or any other Paul, Plevin attorney, by calling (619) 237-5200.