California law requires overtime to be compensated at 1.5 times the “regular rate” of pay for all hours worked in excess of 8 hours a day or (like federal law) 40 hours in a week, and twice the regular rate of pay for hours worked in excess of 12 in a day or 8 on a seventh consecutive day of work. The regular rate must, in addition to the “straight time” rate (for hours less than or equal to 8 per day/40 per week), incorporate shift premiums, non-discretionary bonuses, and other compensation earned during the pay period.
Until this month, it was uncertain how “flat sum” bonuses — those not based on the number of hours worked — were to be taken into account in calculating the “overtime rate” during the pay period in which they were paid. The California Department of Labor Standards Enforcement (DLSE) policy guidance advised that the divisor for determining the regular rate was all non-overtime hours worked during the pay period. The federal formula used by the U.S. Department of Labor (DOL) advised all hours worked, including overtime hours,
should be included in the divisor. Generally, this meant that employers using the DLSE policy guidance method would pay a higher amount of overtime pay than those who used the DOL’s method.
In Alvarado v. Dart Container Corp., decided March 5, 2018, the California Supreme Court ruled a flat sum bonus is calculated as part of the regular rate of pay for overtime purposes. The California Supreme Court explained, under the state’s labor regulations, a flat sum bonus should be added into the non-overtime hours worked, then a new hourly rate recalculated that includes the bonus. To calculate the overtime amount, that hourly rate should then be multiplied by 1.5, and then multiplied by the number of overtime hours. The Court further determined that this calculation formula applied retroactively.
The Supreme Court’s decision could have an adverse effect on California employers who incorporate flat-sum bonuses into their compensation structure, particularly in light of the retroactive application of the decision. Therefore, we recommend employers that have paid such bonuses review their current practices and bring to their legal counsel any claim by a former worker that their overtime pay was incorrectly calculated due to receipt of a flat-sum bonus.
The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.
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