United States: California Supreme Court Rejects Federal Regulation On How Overtime Is Computed On Non-Production Flat Sum Bonuses

On March 5, 2018, the California Supreme Court issued an important decision in Alvarado v. Dart Container Corporation ("Alvarado") changing how employers must calculate overtime pay on certain types of bonuses. This decision will impact all California employers who provide non-production flat rate bonuses, such as attendance and longevity bonuses, to their employees, and will likely create a new wave of wage and hour litigation in the state.

Federal Regulation vs. DLSE Enforcement Position

Under both California and federal law, overtime is computed based on an employee's regular rate of pay, which includes different kinds of remuneration such as non-discretionary bonuses. Under federal regulations, an employee's regular rate of pay on all types of bonuses is calculated by taking total compensation in a given workweek, including any bonus, and dividing by the total hours worked for that workweek, including overtime hours. Next, the regular rate is multiplied by 0.5 for overtime hours to arrive at the applicable overtime premium rate and then multiplied by the number of overtime hours worked for the overtime premium pay due. If the bonus covers a period longer than a workweek, once the amount of the bonus can be ascertained, it must be apportioned back over the period during which it is earned.

However, the California Division of Labor Standards Enforcement ("DLSE") has for decades taken a contrary position in its Policies and Interpretations Manual ("DLSE Manual"). The DLSE Manual provides two methods of computing overtime depending on whether the bonus is a "production" or a "flat sum" bonus. For a production bonus, the DLSE uses the federal method described above: Dividing the bonus by the total hours worked, including overtime hours, during the period to which the bonus applies for the regular rate, and multiplying the regular rate by 0.5 for overtime hours and 1.0 for double time hours. For a flat sum bonus, the regular rate is determined by dividing the bonus by the non-overtime hours worked during the period to which the bonus applies and using multipliers of 1.5 for overtime and 2.0 for double time.

This conflict between federal regulations and the state labor commissioner enforcement position has for years created confusion among employers on how to compute overtime on bonuses. 

Alvarado v. Dart Container Corporation

This conflict was at the heart of the dispute in Alvarado, where the employer computed overtime on weekly attendance bonuses based on the federal regulation (divisor is total hours worked including overtime and multipliers are 0.5 and 1.0), while the plaintiff argued that the calculation should be based on the DLSE's formula for flat sum bonuses (divisor is non-overtime hours worked and multipliers are 1.5 and 2.0). The employer obtained summary judgment in its favor before the trial court and the plaintiff appealed.

On January 14, 2016, the California Court of Appeal in a published decision resolved this conflict when it rejected the DLSE's dual-formula policy and held that the federal formula for computing overtime also applied to flat sum attendance bonuses. The Court of Appeal found that there was no state law or regulation that provides a formula for computing overtime on bonuses (and the provisions in the DLSE Manual, although deserving of consideration, did not have the force of law), and the employer therefore lawfully applied the federal formula. The plaintiff appealed this decision to the California Supreme Court.

However, the California Supreme Court rejected the Court of Appeal's holding and adopted the DLSE's dual-formula. Based on this ruling, the federal formula for computing overtime is no longer permissible if an employee is paid a non-production bonus, such as a flat sum attendance bonus. The Court concluded that the flat sum attendance bonus should be 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 pay period (as opposed to the total number of hours worked, including overtime) and using a multiplier of 1.5 for overtime hours or 2.0 for double time hours (not 0.5 or 1.0 respectively) to determine the employee's overtime pay due on the bonus. Over defense counsel's strenuous objections, the Supreme Court explicitly held that this new controlling interpretation of the law is to be applied retroactively. 

Note that the Supreme Court distinguished a flat sum attendance bonus with "[o]ther 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 a different analysis may be warranted." It has therefore suggested that the federal method of calculating overtime on bonuses may still be applicable for production bonuses and commissions. 

In light of the California Supreme Court's decision in Alvarado, all California employers who provide non-discretionary bonuses to their employees must evaluate whether they are in compliance with Alvarado. Your Lewis Brisbois employment law attorney is available to counsel your business on this decision.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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