March 6, 2018

Federal Formula for Calculating “Flat Sum” Bonus Overtime Ruled Unlawful in California

Reversing the decisions of the trial court and Court of Appeal that had ruled in favor of the employer, the California Supreme Court has held that a California employer cannot use the federal formula for calculating overtime on a flat sum bonus during a single pay period, but must use the method created by the California Division of Labor Standards Enforcement Manual instead.

California generally follows federal law as to how employers should calculate overtime pay on nondiscretionary bonuses for non-exempt employees. However, California statutory, regulatory and case law is silent as how to pay “flat sum” (non-production based) bonuses.

On March 5, 2018, in Alvarado v. Dart Container Corp., the California Supreme Court ruled that employers cannot rely on the federal formula for calculating bonus overtime pay, but should use a more onerous formula invented by the Division of Labor Standards Enforcement (DLSE) instead.

In this case, the plaintiff, Hector Alvarado, was part of a class of non-exempt warehouse workers, who were paid on an hourly basis and, in addition to their normal wages, an attendance bonus for working on weekends. The amount of the bonus was a flat sum of $15 per day of weekend work.

The employer factored in the attendance bonus into the employee’s regular rate of pay for purposes of calculating overtime using the formula in the Fair Labor Standards Act. Using the FLSA method, the employer paid the employees by dividing total compensation, including the bonus, by total hours worked, including overtime hours.

The plaintiff argued, and the Supreme Court agreed, that total compensation should be divided by the number of non-overtime hours the employee worked during the pay period, resulting in a formula that is marginally more favorable to employees. 

The method argued for by the plaintiff was addressed in the DLSE’s enforcement policy manual, which created the policy without engaging in any regulatory rulemaking. Even though the Court found that DLSE’s policy to be a void “underground regulation,” the Court found support for the DLSE’s policy interpretation in the plain meaning of “regular rate of pay” as well as in the Labor Code and applicable Wage Order, and deemed the policy a correct interpretation of existing law.   

To make matters worse for employers, the Court also held that DLSE’s formula applies retroactively.

California employers are advised to carefully examine their bonus structure for non-exempt employees to determine whether or not they are calculating overtime on that bonus appropriately.