California Supreme Court Clarifies Overtime Calculation Involving Flat Sum Bonuses

Employment Law  

June 28, 2018

In a less-than-favorable decision for employers – Alvarado v. Dart Container Corporation – the California Supreme Court addressed how to calculate the overtime pay rate when the employee earns a non-production, flat sum bonus in a single pay period. In Dart, the parties agreed that a flat sum bonus must be factored into the regular rate of pay for calculating overtime; however, they disagreed on how to determine the per-hour value of the bonus.

Plaintiff relied on the Division of Labor Standards Enforcement (“DLSE”) policy providing that, in determining the regular rate of pay, the employer must allocate the bonus only to non-overtime, regular hours worked during the pay period. The defendant-employer advanced the federal formula, which allocates the bonus to all hours worked, including overtime hours. In other words, the court addressed whether the divisor for purposes of calculating the per-hour value of the bonus should be: (1) the number of hours the employee actually worked during the pay period, including overtime hours (the federal formula); or (2) the number of non-overtime hours the employee worked during the pay period (the DLSE formula).

Based on California’s longstanding policy discouraging overtime, and the liberal construction of labor laws in favor of worker protection, the court ultimately concluded that the DLSE interpretation was applicable. Thus, only non-overtime hours should be considered when determining the per-hour value of flat sum bonuses in calculating overtime pay. This method provides for a greater per-hour value (regular rate) than the FLSA method whenever overtime has been worked, which increases the employee’s wages.

Employers should examine their bonus policies and their procedures for calculating overtime when bonuses are in play. Unfortunately, the decision also applies retroactively, meaning that many employers may have exposure for past practices. Employers should note, however, that the court explicitly limited its decision to non-production, flat sum bonuses, and it does not apply to other types of non-hourly compensation, such as a production, piecework, or commission bonus.