California Supreme Court Adopts Employee-Friendly Test For Calculating Overtime On Flat-Sum Bonuses

By Swerdlow Florence Sanchez Swerdlow & Wimmer

March 13, 2018

The California Supreme Court has adopted an employee-friendly test for calculating the
overtime due on a non-discretionary, flat-sum bonus. Overtime pay is based on a non-
exempt employee’s “regular rate of pay” – not the employee’s stated hourly rate – and it
includes all non-discretionary compensation paid to the employee, including flat-sum
bonuses, such as an attendance bonus. In the recently decided Alvarado v. Dart
Container Corporation of California, the California Supreme Court broke with federal
law and ruled that only non-overtime hours should be considered when calculating the
overtime owed on a non-discretionary, flat-sum bonus, rather than the total number of
hours an employee works during the applicable pay period.

Alvarado involved a company’s policy of paying employees an attendance bonus of
$15.00 per day for working a full Saturday or Sunday shift. Dart Container Corporation
had calculated an employee’s regular rate of pay by dividing the employee’s total
compensation during a pay period (straight-time wages plus bonuses) by the total hours
worked in that pay period (including overtime hours). The California Supreme Court
held this was incorrect and, in overturning the lower courts and adopting the
methodology of the California Division of Labor Standards Enforcement (DLSE), ruled
that only the non-overtime hours should be considered when calculating the bonus’ per-
hour value. The Court reasoned that a flat-sum bonus is payable whether or not an
employee works overtime during the pay period and is, therefore, earned by straight-time
alone. This formula will result in a higher regular rate of pay and, thereby, higher
overtime pay for a non-exempt employee than the federal formula.

California employers that provide non-discretionary, flat-sum bonuses, like attendance
bonuses, should now review their practices for calculating overtime to ensure compliance
with the Alvarado decision. Alvarado expressly limited its decision to flat-sum bonuses,
as opposed to other kinds of non-discretionary compensation, such as production
bonuses, piece work, and commissions, in which a “different analysis may be warranted.”
Regardless of this limitation, California employers should be cautious about relying on
federal interpretations of overtime calculations given that California consistently
interprets its wage-and- hour laws to favor employees.

We also would remind employees that the “regular rate of pay” calculation may stretch
over multiple workweeks depending upon the underlying basis for the non-discretionary
compensation (e.g., a quarterly production bonus), and may require the retroactive
calculation of overtime for that extended period.