California Supreme Court – New Overtime Calculation

This month the California Supreme Court decided the case of Alvarado v. Dart Container Corporation of Cal., S232607 (March 5, 2018).  At issue in the Alvarado case was whether the employer correctly calculated the overtime rate for employees who had received a flat sum bonus.  The flat sum bonus was given to Dart Container employees who worked the weekend shift to encourage employees to take the less desirable shift.

Basic Overtime Rule

The Court recognized the established principal of calculating the necessary overtime rate by using the employee’s weighted average.  California law requires overtime to be based on the employee’s “regular rate of pay.”  Specifically, an employer must pay an employee at the rate of 1.5 times the employee’s “regular rate of pay” for all hours worked in excess of 8 hours a day.  The regular rate of pay adjusts the employee’s normal hourly rate to include additional compensation the employee has earned – such as non-discretionary bonuses.

Pre-Alvarado Determination

California employers have traditionally followed the Division of Labor Standards Enforcement’s standards in calculating the “regular rate of pay” for flat sum bonuses. Generally, this would permit an employer to calculate an employee’s “regular rate of pay” by dividing the employee’s total compensation for the week (not including any overtime premiums, which is what the “regular rate of pay” would impact) by that employee’s total hours worked for that same week.

New Calculation for Flat Sum Bonuses

California now requires an employer to calculate a non-exempt employee’s additional overtime by dividing the amount of the flat sum bonus by the actual number of non-overtime hours worked by the employee, then multiplying that result by 1.5 (to determine a per hour value) and then multiply that result by the number of overtime hours worked (to determine total overtime wages owed). This additional overtime is then added to the overtime compensation attributable to the employee’s hourly wages (calculated by multiplying the employee’s normal hourly rate by 1.5 and then by the number of overtime hours). 

If an employee earns $12/hour, works 24 regular hours, 1 overtime hour, and earns a $200 flat sum bonus in one workweek, then you would calculate as follows:

($200 bonus) / 24 actual non-overtime hours worked = $8.33
Overtime from Bonus = $8.33 x 1.5 x 1 overtime hour worked = $12.50
Overtime from Hourly Wages = $12 (hourly rate) x 1.5 x 1 overtime hour worked = $18
Total Overtime = $30.50
Total Compensation
$288 regular wages (24 hours x $12)
$30.50 overtime wages
$200 bonus
$518.50 total pay

New rule only applies to flat sum bonuses

The definition of “flat sum bonus” is key to understanding the Court’s decision and whether or not it impacts your business.

What is a flat sum bonus?

The Court’s ruling is limited to flat sum bonuses.  A flat sum bonus is additional compensation that does not change depending on the number of hours worked by an employee, the profit/loss of the company, employee performance, or any other variable factors.  Remember, the flat sum bonus at issue in Alvarado was a flat sum provided to any employee who was willing to work the weekend shift.

In so ruling, the Court reasoned that because the form of compensation involved a fixed-value amount that had no direct relevance to the actual number of hours worked, the amount could not be seen as compensation for any overtime hours worked. The Court then held that, as a result, the per-hour overtime value of the bonus could only be calculated by dividing the bonus by the actual number of non-overtime hours worked by the employee, as opposed to the total number of total hours worked.

What Does This Mean for Your Business?
1. If you give flat sum bonuses you will need to modify the way that you calculate the employee’s regular rate of pay when the employee works overtime.

2. If you DO NOT give flat sum bonuses, then the ruling does not impact how you calculate regular rate of pay.

3. If you have questions about whether  your bonus structure consists of any flat sum bonuses, call us at 559-825-6629 or email us at info@corehrteam.com.