The California Supreme Court issued a decision Monday in a case that is sure to cause headaches for employers when compensating employees through flat sum bonuses. In Alvarado v. Dart Container Corporation of California (S232607) the Court held that for purposes of calculating the regular rate, a flat sum bonus is to be allocated only to the nonovertime hours worked. This holding departs from the calculation methods broadly considered compliant outside of California under the Fair Labor Standards Act (“FLSA”) and regulations issued by the U.S. Department of Labor.

In Alvarado, the plaintiff was a nonexempt warehouse associate who sued on behalf of a putative class of employees who were paid on an hourly basis. In addition to their normal hourly wages, employees also received an “attendance bonus” if they were scheduled to work on a Saturday or Sunday, and did so, completing the full work shift. The amount of the bonus was a flat sum of $15 per day of weekend work, regardless of whether the employee worked in excess of the normal work shift on the day in question. The issue before the Court was the appropriate formula for calculating the employees’ overtime compensation.

The California Supreme Court unanimously held that the flat sum bonus should be factored into an employee’s regular rate of pay by dividing the amount of the bonus by the total number of non-overtime hours actually worked during the relevant pay period (rather than dividing all compensation received during the pay period by all hours worked), and using 1.5, not 0.5, as the multiplier for determining the employee’s overtime pay rate. Employers in California should revisit their overtime policies and methods of calculation in light of this new decision.