California Supreme Court Ruling on Calculating Flat Sum Bonuses in Overtime Pay is Retroactive

Posted: March 13, 2018 | News

March 2018

Most California employers are already aware that when they calculate an employee’s overtime rate, the employer must include all forms of pay made to the employee.  Recently, the California Supreme Court issued an opinion clarifying how the overtime rate must be calculated when an employee is paid a flat sum bonus in a single pay period, when that flat sum bonus is not tied to an incentive for each hour the employee works.

In Alvarado v. Dart Container Corp. of California, the California Supreme Court determined that when calculating an employee’s regular rate of pay, the total compensation for the pay period must be divided by the number of non-overtime hours the employee worked, rather than the total number of hours worked by the employee.  This ruling diverges from the federal formula, which uses a divisor of all hours actually worked by the employee in the pay period, including overtime hours. 

Unfortunately for California employers, the Court made clear that its decision is retroactive.  But in some positive news, the Court limited its opinion to flat sum bonuses like the one at issue in the Alvarado decision, where employees received a flat amount ($15 per day) as an attendance bonus to incentive employees to work on weekend shifts.  The decision, therefore, is limited to flat sum bonuses similar to the attendance bonus discussed in the case.  The Court stated that other types of non-hourly compensation, such as production or piecework bonuses or commissions, may warrant a different analysis.

As for the reason behind the court’s decision?  The Court explained that California policy clearly favors an eight-hour workday/40-hour workweek, and that by requiring employers to pay premium wages for overtime, it creates an incentive for employers to hire more workers and a disincentive to increase the hours of existing workers.  Ultimately, the Court stated that its decision was based on an obligation to discourage employers from imposing overtime work and favor the protection of employees’ interests.

Employers who pay non-exempt employees a flat sum amount in addition to an hourly rate are encouraged to speak with competent employment law counsel to review the manner in which overtime is calculated and paid, as well as their options in light of the California Supreme Court’s decision that the ruling is retroactive.  Those interested in reading the California Supreme Court’s decision in Alvarado v. Dart Container Corp. of California may find it here: 

http://www.courts.ca.gov/opinions/documents/S232607.PDF

Colleen M. McCarthy

Colleen M. McCarthy, Esq. is a Partner and chairs the Firm’s Employment Practices Group. She has dedicated her practice to representing and protecting employers, with a particular emphasis on risk mitigation through preventative counseling and sound practical advice. For 15 years, Ms. McCarthy has counseled employers about the complicated employment laws that impact their businesses to ensure that they are in compliance, and to reduce the chance of costly litigation. Ms. McCarthy may be reached by phone at (949) 608-6900 or email cmccarthy@ferruzzo.com