On March 5, 2018, The California Supreme Court issued a decision regarding the method by which an employee’s overtime pay is calculated when an employee receives a bonus attributable to the single pay period in which the overtime is worked.
Overtime pay is based on the employee’s “regular rate of pay,” which includes all forms of pay received by the employee, including such things as bonuses, incentive pay, and even the value of certain benefits (e.g., cash-in-lieu payments).
In this case, the court considered how to calculate the regular rate of pay for purposes of overtime compensation for a flat sum bonus earned during a single pay period. The plaintiff, Hector Alvarado, was employed by the defendant Dart Container Corp. as a warehouse associate. Dart paid Alvarado and his fellow employees on an hourly basis plus a $15 per day “attendance bonus” for working Saturday or Sunday shifts. A dispute arose as to how the flat sum bonus should be factored into an employee’s regular rate of pay.
Dart, relying on regulations under the federal Fair Labor Standards Act (FLSA), calculated the regular rate as follows: (1) multiply the overtime hours by the base hourly rate, (2) add the total hourly pay for non-overtime work as well as any other compensation, including attendance bonuses, (3) and divide this base compensation total by the total hours worked, including overtime hours worked. This formula yielded a regular rate that Dart would then use to calculate the overtime premium due to employees.
Alvarado argued that the method adopted by the California Department of Labor Standards Enforcement (DLSE) in its manual should apply by which the bonus would be divided by only non-overtime hours to determine its per hour value. The DLSE method for calculating the per-hour value of the bonus yielded a higher regular rate and increased the employee’s overtime pay accordingly.
The California Supreme Court agreed with the DLSE methodology applied, holding that the per-hour value of the bonus for purposes of calculating the employee’s regular rate during the pay period in question is calculated by dividing the bonus amount by the non-overtime hours worked during the pay period. In coming to its decision, the Court noted that the attendance bonus at issue is not tied to the total hours worked and could be earned without working overtime at all. Because the bonus is payable regardless of overtime, it should be allocated to the regular non-overtime hours for purposes of calculating the regular rate. The Court also engaged in a lengthy analysis of state policies, interpretation of the state Labor Code, and the IWC Wage Orders in coming to its decision.
The important takeaway for employers is the formula issued by the court with respect to calculating overtime – flat sum bonuses awarded in a particular pay period should be factored into an employee’s regular rate by dividing the amount of the bonus by the total number of non-overtime hours actually worked during the pay period.
The Court also determined its decision would apply retroactively, not just prospectively. As such, employers should immediately review their overtime pay practices and/or consult their legal counsel to determine if they are in compliance with the Court’s decision. It is important to note that this decision is limited to flat-sum bonuses. The Court stated that other types of non-hourly compensation such as production bonuses may warrant a different analysis. Employers considering any form of extra pay/incentives for employees should consult their legal counsel.
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