Computing Overtime When an Employee Earns a Flat Sum Bonus

California Supreme Court Issues Important Guidance on Computing Overtime

Under California law, overtime pay is based on an employee’s “regular rate of pay,” which is not necessarily an employee’s regular hourly wage. This is because an employee’s “regular rate of pay” includes all forms of compensation that an employee receives, e.g., production bonuses. As a result, calculating overtime pay in California is not always as straightforward as multiplying the number of overtime hours worked by one-and-a-half times an employee’s hourly rate (so called “time-and-a-half”). Thankfully, the California Supreme Court has recently clarified a legal gray area that has long been problematic for employers: factoring in flat sum bonuses to overtime computations. In Alvarado v. Dart Container Corporation of California (2018) 4 Cal.5th 542, the Court held that for purposes of determining an employee’s “regular rate of pay,” an employee’s total compensation during the pay period, should be divided by the total number of non-overtime hours worked (only), rather than the sum of the hours actually worked during the pay period, which might include overtime hours.

In Alvarado, the employer paid its employees a flat sum “attendance bonus” of $15 per day as an incentive for working a full shift on a Saturday or Sunday. Because there was no specific state law governing the issue of flat sum bonuses, the employer relied on a commonly used federal formula to calculate the regular rate of pay. Specifically, the employer calculated the regular rate of pay by dividing the total number of hours (non-overtime and overtime) worked during a pay period. An employee brought a class action lawsuit against the employer alleging that the employer failed to properly calculate his overtime pay under California law. The employee argued that the regular rate of pay should be determined by dividing an employee’s total compensation by the number of non-overtime hours worked as opposed to the sum of all hours actually worked. The Court ruled in favor of the employee.

What This Means for Employers:

This case is bitter-sweet for California employers. On the one hand, it provides clear guidance for calculating overtime pay. On the other hand, it is yet another reminder of the counterintuitive nature of California’s complex wage and hour laws. Overall, this case serves as a reminder that despite an employer’s best intentions, California courts, as a matter of policy, interpret wage and hours laws liberally in favor of employees. Any agricultural employers utilizing production bonuses, piece-rate bonuses, or any other per pay-period incentive pay are well advised to consult with their legal counsel. If your company has concerns about its incentive pay program or its overtime calculations, please contact Barsamian & Moody.

The goal of this article is to provide employers with current labor and employment law information. The contents should neither be interpreted as, nor construed as legal advice or opinion. The reader should consult with Barsamian & Moody at (559) 248-2360 for individual responses to questions or concerns regarding any given situation.