Why it matters

In an employee-friendly opinion, the California Supreme Court set forth the calculation of a worker’s overtime pay rate when he or she has earned a flat-sum bonus during a single pay period. Hector Alvarado claimed that Dart Container Corp. of California improperly computed his overtime pay. He argued that the employer should have used the actual number of nonovertime hours the employee worked during the relevant pay period as the divisor for purposes of calculating the per-hour value of the one-time “attendance bonus.” Dart moved for summary judgment, countering that the divisor should be the number of hours the employee worked during the entire pay period, including overtime hours. A trial court granted the motion in favor of the employer, and an appellate panel affirmed. The state’s highest court reversed, holding that the divisor should be the number of nonovertime hours actually worked by the employee during the pay period, a formula advocated by the state labor department. The California Supreme Court also indicated the decision would apply retroactively, presenting the need for employers to review their calculations both historically and prospectively.

Detailed discussion

A warehouse associate for Dart Container Corp. of California from September 2010 to January 2012, Hector Alvarado was one of many employees who received a weekend “attendance bonus.” Hourly workers were paid a flat sum of $15 per day of weekend work in addition to their normal hourly wages, regardless of whether the employee worked in excess of the normal work shift on the day in question.

To calculate an employee’s overtime compensation, Dart multiplied the number of overtime hours the employee worked during the relevant pay period by the normal hourly wage rate to obtain a base hourly pay for the overtime work. Dart then added the total hourly pay for nonovertime work during the pay period, any nonhourly compensation earned (such as the attendance bonus) and the base hourly pay. The employer divided that total by the number of hours the employee worked during the pay period, including overtime hours, to obtain an hourly rate. Dart then multiplied that hourly rate by the total number of overtime hours in the pay period, divided it in half and added the base hourly pay to the overtime to get the total overtime compensation for the pay period.

Alvarado advocated for a different formula. He would first calculate the overtime compensation attributable only to the employee’s hourly wages, multiplying the normal hourly wage rate by 1.5 and by the number of overtime hours. Next he would calculate the overtime compensation attributable only to the employee’s bonus by calculating the bonus’s per-hour value (based on the number of nonovertime hours worked) and then multiplying that per-hour value by 1.5 and by the number of overtime hours worked. Finally, Alvarado suggested combining these amounts to obtain the total overtime compensation for the pay period.

The key distinction: whether the flat-sum attendance bonus is allocated to all hours worked or only to the nonovertime hours worked. Using the latter as the divisor results in a more favorable calculation for employees.

After Alvarado filed a putative class action against Dart alleging the company’s calculations violated California labor law, the employer moved for summary judgment. In support of its formula, Dart advised the trial court to rely on a federal regulation explaining how to factor a flat-sum bonus into an employee’s regular rate of pay. The only California regulation on point came from the Division of Labor Standards Enforcement (DLSE), and that policy is void for failure to comply with the Administrative Procedure Act (APA), Dart argued.

The trial court granted the employer’s motion for summary judgment, and an appellate panel affirmed. In a unanimous opinion, the California Supreme Court reversed. The court began with the question of whether the DLSE’s enforcement policy controlled its analysis of Dart’s calculations. If it did, then the case was decided in favor of Alvarado. If it did not control, the court could nevertheless follow it.

In 1996, the California Supreme Court decided Tidewater Marine Western, Inc. v. Bradshaw, where the court found that DLSE’s manual contained void underground regulations in violation of the APA. Dart pointed to this decision as support for its reliance on federal regulations, but the court made a careful distinction.

“But ‘void,’ in this context, does not necessarily mean wrong,” the court said. “If the policy in question is interpretive of some governing statute or regulation, a court should not necessarily reject the agency’s interpretation just because the agency failed to follow the APA in adopting that interpretation; rather, the court must consider independently how the governing statute or regulation should be interpreted.”

In other words, an agency’s underground interpretive regulation should not be afforded any special weight or deference, but it is nonetheless something a court may consider, the court explained, and assuming the court is persuaded that the agency’s interpretation is correct, the court may adopt it as its own. “Moreover, the persuasiveness of the agency’s interpretation increases in proportion to the expertise and special competence that are reflected therein, including any evidence that the interpretation was carefully considered at the highest policymaking level of the agency.”

The DLSE manual addresses the precise calculation at issue. Section 49.2.2.2 states: “If the bonus is a flat sum, such as $300 for continuing to the end of the season, or $5 for each day worked, the regular bonus rate is determined by dividing the bonus by the maximum legal regular hours worked during the period to which the bonus applies. This is so because the bonus is not designed to be an incentive for increased production for each hour of work; but, instead is designed to insure that the employee remains in the employ of the employer.”

Although the court determined the DLSE policy is a void underground regulation, it also decided it was correct and could be followed.

The court then turned to Dart’s formula, with the recognition that California has a long-standing policy of discouraging employers from imposing overtime work and liberally construes labor laws in favor of worker protection.

Under the Labor Code and the Industrial Wage Commission orders, an employee’s overtime pay rate is a multiple of his or her “regular rate of pay.” The plain meaning of the phrase “regular rate of pay” does not mean “constant,” the court added, as an employee’s regular rate of pay changes from pay period to pay period depending on whether the employee has earned shift differential premiums or nonhourly compensation.

“[T]he weekend attendance bonus at issue here is payable even if the employee works no overtime at all during the relevant pay period,” the court said. “It follows, then, that the bonus is properly treated as if it were fully earned by only the nonovertime hours in the pay period, and therefore only nonovertime hours should be considered when calculating the bonus’s per-hour value.”

Returning to the DLSE policy, the court said the agency recognized an important distinction. “If a bonus is a reward ‘for each hour of work,’ and its amount therefore increases in rough proportion to the number of hours worked (as might be true of a production or piecework bonus or a commission), then it might be said that the payment of the bonus itself constitutes base compensation, including base compensation for overtime work, in which case one might be able to argue that only the overtime premium need be added,” the court said.

But the attendance bonus at issue does not reward the employee “for each hour of work,” and its amount did not increase in rough proportion to the number of hours worked; instead, it is a flat-sum bonus that rewards the employee for completing a full weekend shift. “Accordingly, we conclude—consistent with the DLSE’s policy on point—that the divisor for purposes of calculating the per-hour value of defendant’s attendance bonus should be the number of nonovertime hours actually worked in the relevant pay period, not the number of nonovertime hours that exist in the pay period,” the court said.

Dart’s formula “must be rejected because it results in a progressively decreasing regular rate of pay as the number of overtime hours increases, thus undermining the state’s policy of discouraging overtime work,” the court wrote.

Having sided with the plaintiff, the court then ruled its decision should have retroactive effect. Given the DLSE policy, the defendant “had every reason” to predict the outcome, the court said, not persuaded by the potential for costly civil penalties facing Dart and other employers.

“[I]f we were to restrict our holding to prospective application, we would, in effect, negate the civil penalties, if any, that the Legislature has determined to be appropriate in this context, giving employers a free pass as regards their past conduct,” the court wrote.

“We conclude that the flat sum bonus at issue here should be factored into an employee’s regular rate of pay by dividing the amount of the bonus by the total number of nonovertime hours actually worked during the relevant pay period and using 1.5, not 0.5, as the multiplier for determining the employee’s overtime pay rate.”

To read the opinion in Alvarado v. Dart Container Corp. of California, click here.