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California Supreme Court Sets Out New Formula for Overtime When “Flat Sum” Bonuses Paid

Often California employers reward employees with bonuses without realizing the proper way to calculate overtime when doing so.  This can put an employer at substantial risk if miscalculated over significant time for a large number of workers.

Depending on the number of extra hours worked in a day or a week, California’s overtime rate is either 1.5x or 2x an employee’s “regular rate” of pay.  A worker’s “regular rate” comes from dividing the total compensation received, including commissions and “non-discretionary” bonuses, by all of his or her hours worked in a week. See, Working Overtime in California.

Bonuses fall into two categories: (1) discretionary bonuses not linked to any incentive, contract, policy or promise, such as a holiday bonus; and (2) non-discretionary bonuses which are either incentives to increase productivity, quality of work or attendance; or are paid under a contract, policy or promise.  See, Calculating Overtime With Employee Bonuses in California (March, 2010). Non-discretionary bonuses include “flat sum bonuses” which are usually fixed dollar amounts promised to the employee that are not tied to production or number of hours worked.

In Alvarado v. Dart Container Corporation of California, the California Supreme Court recently determined employers must follow a separate and very specific regular rate calculation when the employee has earned a non-discretionary “flat sum bonus” during a pay period in which he or she has worked overtime.

Plaintiff Mr. Alvarado was an hourly warehouse employee for food service products manufacturer Dart Container.  In addition to his normal hourly wages, he received an “attendance bonus,” a flat sum extra $15 per day of weekend work regardless of the number of hours worked in the weekend shift.

Plaintiff’s class action lawsuit disputed Dart’s formula for calculating overtime compensation for the pay periods in which the plaintiff and co-workers earned the attendance bonus.

Following the commonly accepted federal method, Dart calculated the regular rate by dividing the total amount of compensation, including the flat ($15 per day) bonus, by the total number of hours actually worked during the pay period, including overtime hours.

Since that flat bonus component was not geared to any particular number of hours worked during the pay period, the employee asserted, and the Court agreed, that Dart (a) should have computed a special regular rate for that bonus by separately dividing the flat amount by the non-overtime hours actually worked in the given seven-day pay period; and (b) should have multiplied that rate by 1.5x to reach the amount of per-hour overtime pay attributable to that weekend bonus.

For example: an employee worked 44 total hours in a week, including eight hours per day Monday through Friday plus four overtime hours on Saturday.  Her hourly (straight) rate is $12.  She also received a $15 flat sum bonus for working those four hours on the Saturday shift:

Step 1.  Calculate overtime compensation on hourly wages only:

40 total hours x $12 hourly straight time rate = $480

1.5 overtime rate (i.e. $18) x 4 (overtime hours) = $72

Step 2.  Calculate overtime compensation attributable to the flat sum bonus only (using non-overtime hours actually worked):

$15 (bonus amount) divided by 40 (non-overtime hours actually worked) = $0.375 (the bonus’ per-hour value)

Multiply $0.375 (the bonus’ per-hour value) x 1.5 (overtime multiplier) = $0.563 (bonus overtime amount)

Then multiply $0.563 (bonus overtime amount) x 4 (overtime hours worked on the weekend) = $2.25

Step 3. Now combine all compensation:

$480 (total hourly pay) + $72 (total overtime pay on the hourly wages) + $15 (flat bonus amount) + $2.25 (total overtime pay on the flat bonus) = $569.25

This is a simple illustration.  The calculations would compound if the employee had incurred double-time during the weekend work, received more than one rate of pay during the week, earned the bonus over more than one pay period, and/or earned other non-discretionary bonuses in addition to the $15 flat sum.

While the decision was limited to this specific type of compensation, the Court also observed without elaboration that different calculations may be warranted for other sorts of nondiscretionary bonuses. California management and workforce thus must await possible future refinements.

Please contact Tim Bowles, Cindy Bamforth or Helena Kobrin for any assistance on the potential impact of employee bonuses on calculating compensation plans.

Cindy Bamforth

March 22, 2018