The California Supreme Court recently decided the question of how an employee’s overtime pay rate should be calculated when the employee has earned a flat sum bonus during a single pay period.1 In Alvarado v. Dart Container Corp. of California, there was no dispute that the bonus needed to be factored into the employee’s regular rate of pay. The question addressed by the court was whether the divisor for purposes of calculating the per-hour value of the bonus should be (1) the number of hours the employee actually worked during the pay period, including overtime hours; (2) the number of non-overtime hours the employee worked during the pay period; or (3) the number of non-overtime hours that exist in the pay period, regardless of the number of hours the employee actually worked. The court selected option two: the number of non-overtime hours the employee worked during the pay period. Based on this divisor, the court concluded that a flat sum bonus is “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 and using 1.5, not 0.5, as the multiplier for determining the employee’s overtime pay rate.”

In Alvarado, the employer paid an “attendance bonus” to employees who were scheduled to work on a Saturday or Sunday, and who completed the full work shift. The total bonus was $15 per day of weekend work, regardless of whether the employee worked in excess of the normal work shift. The attendance bonus was not tied to working any other shifts, or working a minimum threshold number of hours, during the week. The court noted that the attendance bonus did not reward the employee “for each hour of work,” and its amount did not increase in rough proportion to the number of hours worked; rather it was a flat sum bonus that rewarded the employee for completing a full weekend shift.

In reaching its conclusion, the court first rejected the argument that it was required to follow federal law. Next the court rejected the FLSA approach of attributing the bonus to all hours worked, reasoning that the weekend bonus was payable even if the employee worked no overtime during the pay period. The court then rejected the argument that the bonus should be attributed to the total possible number of non-overtime hours in a week (40 hours) irrespective of the number actually worked by the employee, as such would reduce the overtime pay rate of part-time employees in California. Ultimately, in reaching its decision, the court was guided by two principles: (1) the obligation under California law to pay premium pay for overtime work reflects a policy of discouraging employers from imposing work in excess of 8 hours a day and 40 hours a week; and (2) state labor laws are liberally construed in favor of worker protection. From there, the court concluded it is “obligated to prefer an interpretation that discourages employers from imposing overtime work and that favors the protection of the employee’s interests.”

The impact of the court’s decision is illustrated as follows:

Employee A works an 8-hour shift on Monday, Tuesday, Wednesday, Thursday and Friday. Employee A also works a 6-hour shift on Saturday. Employee A is paid $13 per hour, and earns a $15 attendance bonus for the Saturday shift. For purposes of determining Employee A’s regular rate of pay, the $15 bonus is divided by the total non-overtime hours worked (40 hours) for a per-hour value of $0.38, giving the employee a regular rate of $13.38.

Employee B, on the other hand, works only a 10-hour shift on Tuesday, an 8-hour shift on Thursday, and a 6-hour shift on Saturday. Employee B is paid $13 per hour, and earns a $15 attendance bonus for the Saturday shift. For purposes of determining Employee B’s regular rate of pay, the $15 bonus is divided by the total non-overtime hours worked (22 hours)2 for a per-hour value of $0.68, giving the employee a regular rate of $13.68.

If the bonus were divisible by all hours worked (as permitted by the FLSA), the per-hour value of the bonus would be $0.33 for Employee A (not $0.38), and $0.63 for Employee B (not $0.68). And, if the bonus were divisible by all potential non-overtime hours (i.e., 40 hours), the per-hour value for both Employee A and Employee B would be $0.38. The method selected by the court, therefore, provides for a greater per-hour value (regular rate) than the FLSA method whenever overtime has been worked.

The Alvarado decision also requires that overtime on the bonus be paid at 1.5 times the regular rate derived from the bonus, not 0.5 times the regular rate as is permitted by the FLSA. Focusing only on the pay derived from the bonus, under the FLSA method Employee A would be entitled to the $15 bonus plus an overtime premium of $0.99 ($0.33 FLSA regular rate x 0.5 x 6 hours of overtime = $0.99). By contrast, under the Alvarado method, Employee A would be entitled to receive the $15 bonus plus an overtime premium of $3.42 ($0.38 California regular rate x 1.5 x 6 hours overtime). The FLSA method treats the bonus itself as compensation for all hours worked, before requiring payment of a half-time overtime premium, whereas the Alvarado method treats the bonus as not having provided any compensation for overtime hours.

The court explicitly noted that its decision was limited “to flat sum bonuses comparable to the attendance bonus at issue [in Alvarado]. Other types of non-hourly compensation, such as a production or piecework bonus or a commission, may increase in size in rough proportion to the number of hours worked, including overtime hours, and therefore a different analysis may be warranted.”

In light of Alvarado, employers are encouraged to review their pay practices, including the calculation of overtime when non-exempt employees receive bonuses and other compensation.