overtime pay

California Supreme Court Clarifies Overtime Pay Rules

Bottom Line for Overtime Pay 

In Alvarado v. Dart Container Corporation of California, the California Supreme Court clarified how a flat sum bonus must be enhanced to comply with overtime premium requirements. “Flat sum” bonuses are bonuses whose amounts do not vary depending on employee productivity, efficiency, or effort and include attendance bonuses, safety bonuses, and the like. In summary, the Court held that when calculating overtime in pay periods in which an employee earns a flat sum bonus, employers must divide the total compensation earned in a pay period by only the non-overtime hours worked by an employee. Failing to comply with the March 5, 2018 ruling concerning overtime pay and lump sum bonuses may expose California employers to costly class actions.

Background | California Overtime Case

Plaintiff Hector Alvarado worked for Defendant Dart Container Corporation of California, a manufacturer of food service products, from September 2010 to January 2012. Alvarado filed a class action complaint against Dart in August 2012 for Dart’s alleged failure to provide overtime and several related derivative claims. The primary dispute was Dart’s calculation of employee overtime with respect to an attendance bonus paid to employees who worked on Saturdays and Sundays. In order to encourage attendance on unpopular work days, Dart paid employees an “attendance bonus” of $15 per day for employees who worked on a Saturday or Sunday and completed their full work shift.

Dart Container relied on a federal regulation and a four-step calculation of the bonus applied to the employee’s regular rate of pay, excluding overtime pay. Alvarado presented a formula that allocated the bonus only to regular hours worked during the relevant pay period. Alvarado would then calculate overtime compensation (1.5 times regular pay), then calculate the bonus’ per hour value (for regular hours), and then multiply that per-hour value times 1.5, and that result by the number of overtime hours worked. Plaintiff’s formula resulted in more pay than defendant’s. The key distinction between the two formulas is whether the bonus is allocated to all hours worked or only to the regular hours worked.

overtime pay

Court Rulings

The trial court granted Dart’s motion for summary judgment, which was affirmed by the Court of Appeal. The Court of Appeal held that because there was no valid California law or regulation explaining how to factor a flat sum bonus into an employee’s regular rate of pay for purposes of calculating overtime, the relevant federal regulation must be followed, and the employer’s method complied with the federal method. The Court of Appeal recognized that the DLSE Enforcement Manual did address the calculation of overtime for a flat sum bonus but held that because the DLSE Manual failed to comply with the Administrative Procedure Act (APA), it is void as underground regulation that is “not entitled to any deference.”

The Supreme Court described the issue before it as needing to determine if the divisor for purposes of calculating a per hour value of a bonus should be: (1) the number of hours the employee actually worked, including overtime; (2) the number of non-overtime hours worked; or 3) the number of non-overtime hours that exist in the pay period. The Court ultimately reversed the Court of Appeal’s decision and found that Dart had used the incorrect calculation in factoring in the attendance bonus. In other words, the Court chose the second option and held that the flat sum bonus at issue 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. Further, the Court’s holding adopted the DLSE’s interpretation, despite finding the DLSE Enforcement Manual was an invalid underground regulation.

Impact

The California Supreme Court’s March 5 ruling (which applies retroactively) establishes a method that results in a much higher overtime rate than the federal method. Given the court’s holding, California employers who pay nonexempt employees flat sum or other similar bonuses should review how they calculate the regular rate for purposes of paying overtime compensation to ensure compliance with the method required by the California Supreme Court. Should you have questions about California’s wage and hour laws, don’t hesitate to contact leading California employment lawyers at Kingsley & Kingsley.

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Posted in Employment Law, Overtime, Wage and Hour and tagged , , .