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Calculating Overtime Pay When Paying a Flat Sum Bonus in a Single Pay Period

ERISA Employee Benefit Plan Litigation   |   Labor & Employment   |   Wage and Hour   |   March 13, 2018
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Failing to comply with last week’s California Supreme Court order concerning overtime pay and lump sum bonuses may expose you to costly class actions like so many other California employers. In a long-awaited decision, the Court determined the total overtime pay calculation when an hourly employee earns overtime and a flat sum bonus during a single pay period. Surprisingly, the Court disagreed with the different formulas argued by both the plaintiff employee and defendant employer. This alert provides notice to employers of required changes to California pay policies and practices for hourly employees.

In Alvarado v. Dart Container Corporation, the California Supreme Court determined that a flat sum bonus, such as a longevity or attendance bonus, should be factored into an hourly employee’s regular pay by dividing the amount of the bonus by the total number of non-overtime (regular) hours actually worked during the relevant pay period. That result should then be multiplied by the overtime rate (for example 1.5 for time and a half) to arrive at the overtime rate. Interestingly, the Court disagreed with the arguments presented by both plaintiff and defendant. Instead, it reasoned that its decision served two overarching principles inherent in California’s Labor Code. First, it recognized the obligation to pay premium pay for overtime work within the state’s policy favoring an eight-hour workday and a six-day, 40-hour work week, while discouraging employers from imposing overtime on workers. Second, it recognized California’s policy that encourages worker retention and labor laws that favor worker protection. 

The dispute in Alvarado arose because plaintiff Alvarado, an hourly employee and a member of a putative class of Dart Container’s California warehouse employees, was to be paid a flat sum “attendance bonus” of $15 per day when he worked weekends as overtime in a single pay period.

Alvarado’s 2012 complaint alleged defendant Dart Container had not properly computed overtime pay under California law. Plaintiff Alvarado claimed violations of various sections of California Labor Code, the Business and Professions Code, and the Labor Code Private Attorneys General Act.

Defendant Dart Container relied on a federal regulation and a four-step calculation of the bonus applied to the employee’s regular rate of pay, excluding overtime pay. Plaintiff presented a formula that allocated the bonus only to regular hours worked during the relevant pay period. Plaintiff would then calculate overtime compensation (1.5 times regular pay), then calculate the bonus’ per hour value (for regular hours), and then multiply that per-hour value times 1.5, and that result by the number of overtime hours worked. Plaintiff’s formula resulted in more pay than defendant’s. The key distinction between the two formulas is whether the bonus is allocated to all hours worked or only to the regular hours worked.

Procedurally, the trial Court granted defendant’s motion for summary judgment, adopting defendant’s formula, and the Court of Appeals affirmed. The state supreme Court reversed the lower Court decisions and held that the California Division of Labor Standards Enforcement (DLSE) Manual interpretation contained the only proper calculation. The Court acknowledged that the DSLE’s purpose was to interpret the state’s wage regulation, but previously, some wage regulations had been ruled void, and as a result, so were the DLSE’s interpretations. Surprising, however, the Court explained that although the void interpretations were not binding, the DLSE’s interpretation of the overtime calculation with the flat sum bonus in a single pay period accurately reflected valid sections of the Labor Code, and therefore, the DLSE’s guidance must be followed in this case. Here, neither Alvarado nor Dart Container argued for the DLSE formula, and their failure caused the supreme Court to reverse the lower Courts’ decisions.

The Alvarado decision makes it clear that employers must follow DLSE guidance provided in § 49.2.4.3 when calculating pay involving overtime and a flat sum bonus in a single pay period. For your convenience, here is the example provided in that section.

Example Involving Overtime, Double Time and Bonus

The bonus of $300.00 for remaining to the end of the season paid to a pieceworker who worked 640 regular hours, 116 time and one-half overtime hours, and 12 double time hours:

Bonus

$300.00

Regular Bonus rate = $300.00 divided by 640

$0.47

1½ x regular bonus rate = 1½ x $0.469

$0.70

Double regular bonus rate = 2 x $0.469

$0.94

Overtime due on bonus for time and one-half hours = $0.703 x 116

$81.56

Overtime due on bonus for double time hours = $0.938 x 12

$11.25

Bonus

$300.00

Overtime on bonus

$92.81

Total due on bonus

$392.81

Total bonus (Plus other properly computed earnings)

 

Click here to view the DLSE Manual

If you have questions about this case or compliance with California Labor Code, please contact Mark Neubauer or Gailya McElroy.


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