Bonus overtime overhaul, a departure from fairness

California Supreme Court decision exposes employers to liability for unpaid overtime on flat sum bonuses

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Yesterday, the California Supreme Court reversed the Court of Appeal deciding the issue of how overtime pay must be calculated for flat sum bonuses, such as flat bonuses for working on a weekend. Unfortunately, its Alvarado v. Dart Container Corp. opinion presents bad news for employers and dealers that have been paying overtime by dividing such bonus by all hours worked to determine a regular rate of pay, and then multiplying by 0.5 to determine the overtime premium rate for such bonus.

We previously reported on the Court of Appeal opinion as a rare win for employers when it held employers could lawfully pay overtime on flat bonuses in this manner. But the California Supreme Court has now reversed that decision and held that the flat bonus must be divided by only regular (non-overtime) hours worked in the pay period and multiplied by 1.5 for all overtime hours worked.

The difference between the two main overtime calculations at issue: (1) dividing the flat bonus by all hours worked and then multiplying by 0.5 for the overtime premium rate, vs. (2) dividing the flat bonus by only regular hours worked and then multiplying by 1.5 for the overtime pay due, often results in a difference of only a few dollars and cents. But the Supreme Court’s holding means employers that have been paying under the less conservative formula (formula 1 above) face potential liability going back years. In the California wage and hour class action and Private Attorneys General Act (PAGA) environment, this decision further solidifies California courts’ employee-friendly stance, and employers would do well to adopt the following rule: “when in doubt, use the calculation that more favors employees, or else.” In fact, the Court expressly rejected Dart Corp.’s plea to have its decision apply only prospectively to future violations, rather than punishing employers for their reasonable reliance on prior decisions.

The Court stopped short of extending this formula to production bonuses, piecework compensation, or commissions. Instead, it limited its decision to flat sum bonuses like the one for attendance in this case, because other types of commissions and bonuses “may increase in size in rough proportion to the number of hours worked, including overtime hours,” requiring a different result. Whereas, the weekend attendance bonus could be earned and payable even if the employee worked no overtime hours.

Sample calculation using the required formula

Assume an employee earns $12/hour, and works 88 hours in the pay period (including 8 overtime hours). The employee receives a flat sum bonus of $15 per day for any weekend day on which she works. In this pay period, employee works two (2) Saturdays, totaling $30. Employee would earn:

  1. $12 x 80 hours = $960 in regular hourly wages.
  2. 8 overtime hours x $12 = $96 in additional wages
  3. $96 x 0.5 = $48 in overtime premium on the hourly wages
  4. Divide flat sum bonus total by regular hours (to get the regular rate) and multiply by 1.5 to get the bonus overtime rate
    1. $30 flat sum / 80 hours = $0.375 per hour
    2. $0.375 per hour x 1.5 = $0.5625 x 8 overtime hours = $4.50 in bonus overtime
  5. $30 in attendance bonus
  6. TOTAL: $1,056 in hourly wages + $48 overtime premium + $30 bonus + $4.50 bonus overtime = $1,138.50

Rationale of the court’s decision

The Court of Appeal had decided to allow the employer’s method of calculation because there was an absence of controlling California law supporting the DLSE’s more employee-favorable method. The Supreme Court agreed that the DLSE’s policy as to this issue was not controlling or entitled to deference, but disagreed that there was no controlling state law on the issue, relying on Labor Code §515 and Wage Order No. 1, which require overtime pay based on the employee’s “regular rate of pay.”

Relying on the state policy to discourage overtime and protect employees, as well as prior case law interpreting “regular rate of pay,” the Supreme Court independently analyzed the result based on the Wage Order[1] and determined that the DLSE’s method of calculation was correct. Given the DLSE’s special expertise in the matter, the Court ruled its policies could be persuasive (and a correct interpretation of controlling state law) even when not adopted under the proper Administrative Procedure Act (APA) procedure and therefore void for that reason.

The Court also considered a third calculation method: whether to divide the bonus by all non-overtime hours that exist in the pay period (rather than the hours actually worked by the employee), as followed in Labor Code §515 for weekly salaries, but rejected this argument since it would reduce the per hour value of the employee’s work. The Court acknowledged that the chosen method also had a similar disparity: the same $15 weekend workday bonus would be worth more per hour for an employee who worked part-time, than one who worked full-time, but this was considered to be an inherent disparity with a flat sum bonus – all other things equal, the bonus will naturally make up more of the part-time worker’s overall compensation.

What should employers and dealers do?

If you are paying flat bonuses, you should review your payroll worksheets and check your payroll company’s calculations regarding overtime pay on bonuses to confirm that you are compliant with the more conservative formula. Additionally, you should review any written policies or pay plans to ensure they comply with the correct calculation, or consider eliminating flat sum bonuses from such plans.

[1] Though the case analyzed the issue under Wage Order No. 1, the language regarding overtime pay is substantially similar to that in wage orders applicable to dealerships.