Seyfarth Synopsis In A Second: A California employer can use the federal formula for calculating overtime on a flat sum bonus, even though the California Division of Labor Standards Enforcement Manual states otherwise.

California law is generally well settled as to how to calculate the regular rate for purposes of determining overtime pay. But this issue has lacked clarity with respect to “flat sum” (non-formula) bonuses. On January 14, 2016, in Alvarado v. Dart Container Corp., the Court of Appeal addressed whether an employer may follow the bonus-overtime formula set forth under federal law, as opposed to the more onerous formula that the Division of Labor Standards Enforcement has advocated in its Enforcement Manual.

The Facts

Hector Alvarado was an hourly employee for Dart Container, which makes cups, plates, and other food service products. Alvarado earned an attendance bonus of $15 per weekend day for each full weekend shift he worked. Dart, following the bonus-overtime method set forth in the Code of Federal Regulations, 29 C.F.R. § 778.110, calculated overtime pay as follows:

  • Straight Overtime Pay: Multiply the number of weekly overtime hours by the straight hourly rate.
  • Overtime Premium Pay: Multiply the total hours worked by the straight hourly rate and then add the attendance bonus to that figure. Then divide this amount by the total number of hours worked (both regular and overtime) to determine the regular rate. To determine the overtime premium owed, multiply the regular rate by the number of weekly overtime hours. 

Following his termination, Alvarado sued Dart for unpaid overtime. Alvarado argued that, for a “flat sum” bonus, California employers must determine the regular rate by dividing the bonus by the maximum regular hours worked as specified in the DLSE Manual, not by the total hours worked. 

The trial court granted Dart summary judgment because its method for calculating overtime on the attendance bonus complied with the federal formula, and there was no binding California authority to the contrary. Alvarado appealed. 

The Appellate Court Decision

Alvarado’s primary argument was that the DLSE’s preferred, employee-generous bonus-overtime formula was binding on Dart.

The Court of Appeal acknowledged that dictum in Marin v. Costoco Wholesale Corp. did opine that the DLSE Manual’s formula was a reasonable effort to prevent dilution of the regular rate. The Court of Appeal also noted, however, that the DLSE Manual itself carries no legal authority. Here, the DLSE supported its interpretation by citing only “public policy,” rather than any statute or regulation. The Court of Appeal, finding no California statutory authority on the calculation of overtime on flat sum bonuses, held that the federal method for overtime calculation applied.  Because Dart’s adherence to the federal formula for flat sum bonus overtime calculation was lawful, the Court of Appeal affirmed the trial court’s ruling. 

What Alvarado Means For Employers

This decision is a welcome win for employers. When California is silent in the face of directly applicable federal authority on an issue of wage and hour law, employers should be able to rely on it in satisfying their obligations under parallel California law. Nevertheless, employers must exercise extreme caution in this area. Alvarado does not hold that all requirements set forth in the DLSE Manual are unenforceable. If a DLSE interpretation is supported by California legal authority, and is more beneficial to the employees than the corresponding federal law, then an employer’s wage and hour calculations likely must follow the formula the DLSE favors.