Once again, the California Supreme Court issues a decision with broad sweeping effects on employers that sets the stage for another tidal wave of wage and hour class actions. With its most recent decision in Hector Alvarado v. Dart Container Corporation of California, the High Court clarifies that when paying employees a fixed bonus the proper calculation of regular rate for purposes of computing overtime wages requires a divisor of nonovertime hours worked. In this context, the High Court takes the opportunity to reiterate that state labor laws are liberally construed to favor employees, and the state consistently supports policies that provide the highest protection for employee rights.

In August 2012, Plaintiff Hector Alvarado filed a class action complaint for failure to pay overtime wages and various penalties associated with the underlying wage claim against his former employer Dart Container Corporation of California, a manufacturer of food service products. During his employment, Dart Container Corp. paid Plaintiff a flat sum “attendance bonus” during each week in which he was scheduled to work on a Saturday or Sunday. The payment of this bonus triggered a necessary adjustment to his regular rate for purposes of calculating overtime wages. The parties disagreed on the proper method for calculating regular rate and overtime compensation.

Relying on federal guidance, Dart Container Corp. calculated overtime compensation as follows: (1) Multiply the number of overtime hours worked during the pay period by the straight hourly rate to obtain based hourly pay. (2) Add total hourly pay for nonovertime work, any nonhourly compensation, and base hourly pay for overtime work to obtain base pay for the pay period; divide total base pay by total hours worked to obtain regular rate of pay for the pay period. (3) Multiply regular rate of pay by the total overtime hours in the pay period and divide by half to obtain the overtime premium. (4) Add the base hourly pay for overtime and the overtime premium to get total overtime compensation for the pay period.

Leaning on underground regulations set forth by the Division of Labor Standards Enforcement, Plaintiff posited that the proper determination of regular rate allocates the flat sum “attendance bonus” only to nonovertime hours worked during the relevant pay period. This would be accomplished as follows: (1) Calculate overtime compensation attributable to hourly wages by multiplying the employee’s straight time rate by one and one-half by the number of overtime hours. (2) Calculate overtime compensation attributable to employee’s bonus by calculating the bonus’s per-hour value and multiplying that per-hour value by one and one-half and the number of overtime hours worked. (3) Combine the foregoing overtime amounts to obtain total overtime compensation for the pay period.

In agreement with Plaintiff’s formula, the High Court held that a flat sum bonus must be treated as if it were earned on a per-hour basis throughout the relevant pay period for purposes of calculating overtime. By example, provided was a simple case scenario in which an employee is paid $15 per hour for two days of work (16 hours x $15/hour = $240) and paid a $30 bonus. The regular rate must be calculated by dividing $270 by 16 hours to equal a regular rate of $16.875. Therefore, the per-hour value of the $30 bonus is $1.875. With this calculation, the High Court clarified that any interpretation that results in a progressively decreasing regular rate of pay as the number of overtime hours increases must be rejected. However, fluctuating bonuses based on hours worked could be subject to different interpretation and calculations.

Of much concern to California employers are the High Court’s closing remarks on the issue, stating, without ambiguity, that its holding has retroactive effects on employers, potentially exposing them to massive civil penalties. Although daunting in scale, the High Court’s directive on recalculating regular rate and protecting against potential lawsuits can be systematically addressed. The following guidance may assist employers identify potential issues and reassess current practices.

  1. Audit compensation practices. If you are providing nonhourly compensation to employees, review your pay practices with your legal counsel to determine if the issues addressed in the Alvarado decision affect the regular rate and overtime wages paid to your employees. If shift differentials or flat sum bonuses, combined with overtime hours worked, result in additional compensation owed, you may want to consider retroactive pay adjustments.
  2. Preserve pay records. Anticipating increased litigation related to the Alvarado decision, it is advisable to maintain pay records for at least seven years. Cloud backup and electronic preservation are recommended to ensure that you have all the information necessary to best protect yourself against wage and hour claims.