California Supreme Court Adopts New Employee-Friendly Formula for Calculating Overtime Pay

In Alvarado v. Dart Container Corp. of California, the California Supreme Court determined how an employee’s overtime pay rate should be calculated when the employee has earned a flat sum bonus during a single pay period.

Facts

Plaintiff Hector Alvarado (Alvarado) was employed by Defendant Dart Container Corporation of California (Dart) as a warehouse associate. Alvarado filed a class action complaint against Dart, alleging the company’s formula for calculating overtime pay was unlawful. Specifically, Alvarado challenged the calculation of overtime with respect to an attendance bonus paid to employees who worked on Saturdays and Sundays.

Dart paid its employees an attendance bonus of $15 per day for employees who completed their full shift on either Saturday or Sunday. The $15 per day bonus was paid regardless of whether or not the employee worked overtime. When calculating overtime pay for attendance bonuses, Dart used a four step process: (1) multiply the number of overtime hours by the employee’s straight time (base hourly pay); (2) add the total hourly pay for non-overtime work, any non-hourly compensation, and the base hourly pay for overtime work from Step One; (3) multiply the total from Step Two with the overtime hours during the relevant pay period (overtime premium pay); and (4) add the base hourly pay from Step One with the overtime premium pay from Step Three to get the total overtime compensation for the pay period. Dart argued their formula was compliant with federal law and should apply because there is no California law providing a formula for calculating overtime on bonuses.

Alvarado argued that Dart’s method of calculation was unlawful and that the regular rate of pay should be determined by allocating the attendance bonus only to non-overtime, regular hours worked. Alvarado argued his method of calculation was supported by the Department of Labor Standards Enforcement (DLSE) Manual and Marin v. Costco Wholesale Corp. (2008) 169 Cal.App.4th 804. The difference between Dart’s formula and Alvarado’s is that where Dart divides total compensation by total hours worked, Alvarado’s proposed formula divides only by non-overtime, regular hours worked.

Dart filed a motion for summary judgment and the trial court granted the motion, relying on the federal law approach of attributing a bonus to all hours worked. Alvarado appealed the trial court’s decision and the court of appeal affirmed. The Supreme Court granted review to determine how a flat sum bonus should be factored into an employee’s regular rate of pay for purposes of calculating overtime.

The California Supreme Court’s Analysis

The California Supreme Court reversed the appellate court decision, agreeing with Alvarado and finding that when allocating a flat sum bonus, an employer must allocate that bonus only to non-overtime, regular hours worked. The main issue addressed by the Court was whether a policy in the DLSE Enforcement Manual was valid. The DLSE Manual states: “If the bonus is a flat sum, such as $300 for continuing to the end of the season, or $5.00 for each day worked, the regular bonus rate is determined by dividing the bonus by the maximum legal regular hours worked during the period to which the bonus applies.” The Court was required to determine whether the DLSE Manual was controlling or whether it was a void “underground” regulation. After an exhaustive discussion about the deference given to administrative agencies, the Court determined the enforcement policy was a void underground regulation.

Despite finding that the DLSE Manual was void, the Court noted that the interpretation of state law contained within it may be correct. The Court explained it was guided by two longstanding principles: (1) there is a state policy favoring an eight-hour workday and six-day 40-hour workweek and (2) the state’s labor laws are to be liberally construed in favor of protecting employee interests. Relying on Labor Code section 510, the Court stated that a flat sum bonus must be treated “as if it were earned on a per-hour basis throughout the relevant pay period.” Accordingly, the Court adopted a new test for calculating the regular rate with flat sum bonuses, which requires employers to calculate the regular rate using only non-overtime, regular hours worked.

It is important to note that the Court limited its holding to situations with flat-sum bonuses. Therefore, production bonuses, piece rate bonuses, and many other bonuses may not be affected by this decision. However, the Court’s decision will apply retroactively.   

Practical Tips for Employers

  • Employers should review their overtime pay practices and determine if they are compliant with this new formula.
  • This decision applies retroactively, potentially exposing employers to penalties and liability based on past practices. Many employers may already face liability for their past practices and it is crucial that any unlawful practices are revised immediately to prevent future liability. This is particularly important if employers have operations in multiple states besides California and have centralized payroll operations that rely upon federal laws.
  • Employers should work closely with expert legal counsel when determining overtime pay practices. If you have questions about whether your current overtime pay practices are compliant with this new formula, please contact the attorneys at Palmer Kazanjian Wohl Hodson LLP.

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