On March 5, 2018, the California Supreme Court decided how an employee’s overtime pay rate should be calculated when the employee earns a flat sum bonus during a single pay period. In Alvarado v. Dart Container Corporation of California (Alvarado), the Court determined that when calculating overtime in pay periods during which an employee earns a flat rate bonus, employers must divide the total compensation earned in a pay period by only the non-overtime hours worked.
This means, according to the Alvarado decision, the correct calculation of overtime associated with a flat sum bonus is the amount of the bonus divided by the regular hours worked by the employee, multiplied by 1.5 (not a 0.5 multiplier):
(Overtime Hours x Regular Rate x 1.5) + (Bonus/Regular Hours Worked x Overtime Hours Worked x 1.5) = Total Overtime Compensation in California
In Alvarado, the plaintiff, Hector Alvarado, was a warehouse associate employed by the defendant, Dart Container Corporation, a manufacturer of food service products. Alvarado was paid on an hourly basis and also received an attendance flat-sum bonus of $15 if he completed full, scheduled shifts on a Saturday or Sunday, regardless of whether he worked more than the normal work shift.
Dart calculated overtime in compliance with federal law, at 29 C.F.R. 778.110, where the regular rate for a weekly bonus is the amount of the bonus divided by all weekly hours worked (both straight hours and overtime hours), and the regular rate is divided by two before multiplying it by the number of weekly overtime hours worked. Alvarado sued for unpaid bonus overtime, arguing that the correct calculation in California to determine the regular rate for flat sum bonuses is to divide the bonus by only the straight time hours worked, as specified in the Division of Labor Standards Enforcement (DLSE) Manual (see 184.108.40.206), and not by the total hours worked.
In other words, the dispute was rooted in how the attendance bonus was to be factored into the employee’s regular rate of pay so that his overtime pay rate (generally, 1.5 times the regular rate of pay) reflected all the forms of regular compensation that he earned. The primary difference between the two calculation formulas was that Dart divided the total compensation by total hours worked, and Alvarado divided by only regular hours, thus excluding overtime hours and resulting in a higher overtime pay.
The Supreme Court agreed with Alvarado and application of the DLSE formula.
California has a longstanding policy of discouraging employers from imposing overtime work through premium overtime pay. For example, through Labor Code § 510 and Industrial Welfare Commission wage orders, California law is more protective of employees than federal law. Federal law does not require premium pay for workdays of more than eight hours, but it does not pre-empt state law in this area. Subsequently, state law is controlling here because it provides more protections for employees.
In Alvarado, the California Supreme Court reversed the lower courts and adopted the DLSE Manual formula because it is in line with California’s policy of discouraging required overtime hours. To reinforce this policy, the Supreme Court reasoned that a flat sum bonus must be treated as if it were earned on an hourly basis throughout the relevant pay period.
In applying the DLSE formula, the Court ruled that when determining the regular rate on a flat sum bonus, the employer must divide the bonus by only the straight-time hours worked during the period, not by all hours. Moreover, the regular rate must be multiplied by 1.5, not 0.5, when applied to the number of overtime hours worked during the week.
Alvarado applies retroactively, which means that California employers who pay flat rate bonuses must ensure immediate compliance with the DLSE formula or risk incurring penalties and liability. So it’s a good time to review your workplace pay policies, bonus structures, and overtime calculations so you are prepared if your overtime calculations are questioned.