Introduction

The California Supreme Court's recent decision in Alvarado v Dart Container has significant implications for employers when determining the regular rate of pay used to calculate overtime following the payment of flat-sum bonuses. California law and the federal Fair Labour Standards Act require employers to pay employees one-and-a-half times their regular rate of pay for every overtime hour that they work. Further, all forms of compensation paid to the employee, including non-discretionary bonuses, must be factored in. For example, an employee whose hourly rate is $10 per hour but who receives a $2,000 performance bonus at the end of the year would have a regular rate of pay of roughly $11.00, and his or her overtime rate of pay would be $16.50 per hour, not $15.

Case overview

The plaintiff in Alvarado claimed that he had been underpaid overtime because his employer did not properly account for a flat $15 attendance bonus that he was paid each week for working on Saturdays and Sundays when determining his regular rate of pay. The employer had performed the regular rate of pay calculation but had allocated the attendance bonus over all hours that the employee had worked during the pay period, including overtime, rather than just the employee's regular, non-overtime work hours.

The issue before the California Supreme Court was whether a flat-sum bonus must be spread across:

  • all hours actually worked by the employee, including overtime;
  • all non-overtime hours actually worked by the employee; or
  • the non-overtime hours that exist in the relevant pay period, regardless of whether they were actually worked.

The court held that employers must calculate the overtime rate of pay in pay periods in which an employee earns a flat-sum bonus by dividing the flat-sum by the non-overtime hours actually worked in that pay period, not the total hours worked (including overtime). In doing so, the court explained that because a flat-sum bonus is payable regardless of how many hours the employee works (ie, irrespective of whether the employee works overtime during the relevant pay period), it should be treated as being earned during only the non-overtime hours worked in the pay period. The court further reasoned that a formula that takes into account overtime hours "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".

The court limited its decision to "flat sum bonuses comparable to the attendance bonus at issue", stating that it was not addressing other "types of nonhourly compensation, such as a production or piecework bonus or a commission" which "may increase in size in rough proportion to the number of hours worked, including overtime hours" and therefore warrant a different analysis.

Comment

The California Supreme Court's decision that employers should consider only non-overtime hours worked results in a higher regular rate of pay for employees who receive flat-sum bonuses because the bonus is divided among fewer hours. Because the court ruled that its decision applies retroactively, employers in California may wish to review their pay policies relating to any flat-sum bonuses – that is, bonuses that are not dependent on the number of hours worked (eg, safety, retention or longevity bonuses) and flat bonuses covering certain shifts or for taking on extra duties. Employers also should note that the court's ruling could impact the regular rate that employers must use to calculate the amounts owed to employees for paid sick leave pursuant to California's Paid Sick Leave Law under one of the methods set out in that statute.

For further information on this topic please contact Ruth Zadikany or Grant T Miller at Mayer Brown LLP's Los Angeles office by telephone (+1 213 229 9500) or email (rzadikany@mayerbrown.com or gtmiller@mayerbrown.com). Alternatively, contact Richard E Nowak at Mayer Brown LLP's Chicago office by telephone (+1 312 782 0600) or email (rnowak@mayerbrown.com). The Mayer Brown LLP website can be accessed at www.mayerbrown.com.

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.