Recently, the California Supreme Court handed down a decision regarding the calculation of the rate of pay for overtime, which is anything but user friendly. A number of our members have indicated they are confused by the specifics of the decision. The following information is meant to clarify the details.
In California, the multiplier for calculating overtime pay is based on an employee’s regular rate, which is not always an employee’s normal hourly wage. The “regular rate of pay” must include almost all forms of compensation that the employee receives. But how do you calculate the regular rate of pay when an employee receives both an hourly wage and a flat sum bonus or incentive – such as an extra $25 for working a weekend shift? This is at the crux of the case in question, Alvarado v Dart Container Corporation of California.
In the case, Dart Container allegedly maintained a policy of paying a flat “attendance bonus” of $15 per day to employees who worked Saturday and Sunday shifts, regardless of the number of hours worked on the weekend shift. A Dart employee (Alvarado) sued, claiming he was improperly paid overtime during the weeks that he earned the weekend attendance bonus.
Alvarado argued that overtime pay on any flat sum bonus or incentive should be divided only by the “regular” (non-overtime) hours he worked that week (the method used by the California Division of Labor Standards Enforcement [DLSE]), not by the “total” hours worked during the week (regular hours plus overtime hours worked – which is the formula used by the federal government and many other states). Under the DLSE method, if an employee worked 48 hours in one week, an employer would calculate the regular rate of pay by dividing 40 regular hours instead of 48 total hours (regular hours plus overtime hours) by all compensation earned in that week. This would result in a higher regular rate of pay and, thus, a higher overtime rate. What was not clear before this case was whether the DLSE method was the law of the state.
After hearing the arguments, the California Supreme Court unanimously approved the DLSE method of calculating the regular rate and held that when a flat sum bonus or incentive is involved the total compensation earned in that week should be divided by only the regular hours worked, but also include the compensation earned as a flat sum bonus. Employers must divide the employee’s total compensation by the employee’s non-overtime hours worked, not by the total hours worked.
The Court reasoned that a flat sum bonus is not tied to the number of hours worked – the $15 will be paid when an employee picks up a weekend shift, regardless of how many hours the employee worked that week. Because the flat sum bonus was payable even if the employee did not work overtime, only the non-overtime hours should be considered when calculating the regular rate of pay.
FYI, the Court also based its ruling on two other policy factors:
- California requires premium overtime pay which is meant to discourage employers from imposing overtime work.
- California labor laws are interpreted liberally in favor of worker protection.
