Key Notes:

  • Employers should evaluate their pay policies and procedures for California employees.
  • Employers that pay flat sum bonuses in California should review their methods for calculating overtime pay.

In March 2018, the California Supreme Court, in Alvarado v. Dart Container Corporation of California, ruled on a method of calculating overtime pay in pay periods in which employees earn a flat sum bonus, adopting a method that is more employee-friendly than required under federal law. Accordingly, employers with operations in California will want to take note, as this decision may impact pay practices and policies. Moreover, this decision applies retroactively, and so employers may have exposure to liability based on past practices.

Under the federal Fair Labor Standards Act (FLSA), overtime pay is to be calculated based on 1.5 times an employee’s regular rate of pay. “Regular rate” includes not only an employee’s normal hourly rate of pay, but also certain additional payments and/or bonuses that are factored in. 29 CFR §778.209 (a) provides that where a bonus payment (even a bonus that only covers a weekly pay period) is considered part of the regular rate at which an employee is employed, it must be included in “regular rate” calculations, but those calculations may use the total hours worked as the divisor. The employer in the Alvarado case, Dart Container Corporation of California (Dart), paid a special bonus of $15 per day to employees who completed work on a Saturday or Sunday shift, regardless of overtime, in acknowledgement that weekend shifts are the least desirable. Dart incorporated this flat sum bonus into its calculations and divided total base pay by the total number of hours worked, including overtime hours. This method was designed to comply with the FLSA. However, an employee brought suit, alleging that his overtime pay was improperly calculated.

The Alvarado Issue

In Alvarado, the issue was what divisor should be used to calculate the per-hour value of a flat sum bonus for overtime calculation purposes. The court was presented with three options:

  1. the total number of hours the employee actually worked during the pay period (including overtime), which would be consistent with federal law;
  2. the number of non-overtime hours worked during the pay period; and
  3. the number of non-overtime hours that exist in the pay period, regardless of the number of hours the employee actually worked.

Dart argued that there was no clear state law governing overtime pay on bonuses, and thus, federal law should control. The court, however, disagreed, citing Labor Code § 510 and Wage Order No. 1. Further, the court noted that while guidance from California’s Division of Labor Standards Enforcement is not controlling, it still may provide useful interpretation for the court and could be adopted.

The court reasoned that California employment law both discourages an employer from imposing overtime on employees and has historically been interpreted as more favorable to employees than federal law. Additionally, the flat sum bonus employees received at Dart was paid simply for completing a weekend shift; in other words, it would be awarded even if no overtime was worked and without regard to an employee’s other shifts. While there may be variation among employees as to the bonus’s per-hour value, the court decided this was not unfair because it was built into the nature of a flat sum bonus. Accordingly, the court rejected the third option of using the number of non-overtime hours that exist in a pay period as a divisor. Ultimately, the court held the second option, that only non-overtime hours should be considered when calculating the bonus’s per-hour value for overtime pay purposes, was the appropriate method to use.

The court limited its decision to flat sum bonuses, but did apply the decision retroactively. For that reason, employers in California will want to take a close look at both current and past pay practices and policies.