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California Supreme Court clarifies how to calculate overtime on flat-sum attendance bonuses to hourl

On March 5, 2018, the California Supreme Court weighed in on the question of how to properly calculate overtime when an employer pays a flat-sum nondiscretionary bonus to employees for working a particular shift. Under California law, when an employee receiving a nondiscretionary bonus works overtime, the bonus must be used as a factor in determining the employee’s regular rate of pay for purposes of determining the employee’s overtime rate of pay. In Alvarado v. Dart Container Corp., the Court provided clarification regarding the correct method of determining an hourly employee’s regular rate of pay and overtime compensation. Specifically, it examined the proper number of hours to be used as the divisor in the equation for determining the regular rate of pay when the employee is paid a flat-sum nondiscretionary bonus. In doing so, the Court held that the proper divisor is the actual number of nonovertime hours the employee worked during the pay period.

Hector Alvarado brought this action against Dart Container Corporation (Dart), which paid its employees a $15 attendance bonus for each day the employee completed a shift on a Saturday or Sunday. In determining an employee’s regular rate of pay, it dividing the sum of the employee’s total attendance bonus amount and regular time compensation amount (including overtime hours paid at the employee’s regular hourly rate) by the total number of hours the employee worked, including overtime, during that pay period. As such, the divisor used by Dart was the total number of hours the employee worked in a given pay period

The Supreme Court, however, determined that the method employed by Dart was incorrect, because Dart used the incorrect divisor in determining the regular rate of pay. Instead of using the total number of hours the employee worked as the divisor, Dart should have used the actual number of nonovertime hours the employee worked. In analyzing the issue, the Court first acknowledged that state law must be liberally construed to protect workers. It was, therefore, obligated to prefer an interpretation that discourages employers from imposing overtime work. It noted that the weekend attendance bonus at issue was payable even when the employee worked no overtime during the relevant pay period. Therefore, the Court rationalized, the bonus had to be treated as if it were fully earned by only the nonovertime hours in the pay period. As such, only nonovertime hours should be considered when determining the regular rate of pay for purposes of calculating overtime.

The Court also held that in order to determine the proper regular rate of pay, only the actual number of nonovertime hours must be considered; the calculation is not based on a presumed 40-hour workweek. The Court distinguished its holding from Labor Code Sec. 515(b)—which states “For the purpose of computing the overtime rate of compensation required to be paid to a nonexempt full-time salaried employee, the employee’s regular hourly rate shall be 1/40th of the employee’s weekly salary”—in that the employees in the present case were paid an hourly wage instead of salary. According to the Court, if the employer was able to assume a 40-hour workweek, it would then improperly lower the value the employee’s overtime compensation.

The Court further held that its method of determining the amount of overtime compensation applies retroactively, ignoring the employer’s asserted due process defense.

In conclusion, this case is an interesting development in the way in which employers must calculate overtime for hourly workers earning bonuses. Employers are encouraged to evaluate their payment practices to ensure compliance. Employees are encouraged to analyze their pay structure to determine if they are being compensated correctly and whether they are owed additional compensation from their employers.

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