Earlier this month, the California Supreme Court today issued a ruling that affects employers who pay employees a flat rate bonus and overtime. The court ruled that when calculating overtime in pay periods in which an employee earns a flat rate bonus, employers must divide the total compensation earned in a pay period by only the non-overtime hours worked by an employee.
All California employers who pay such bonuses should review their policies and pay practices to ensure compliance with this decision (Alvarado v. Dart Container Corporation of California). For assistance in figuring this out, call Sequoia Personnel Services at (707) 445-9641.
Beginning with the most basic premise, employees who perform work in excess of defined statutory limits are entitled to overtime pay under both federal and California law. Generally, both statutory schemes provide for pay at a rate of 1.5 times the “regular rate” earned by the employee.
The regular rate calculation at issue in the Alvarado case involves how to compute the regular rate under California law when an employee is paid a flat sum bonus during a single pay period.
Under the federal Fair Labor Standards Act, the regular rate includes all compensation, earnings, or “remuneration” for work performed, with specific payments excluded—such as reimbursed expenses, reporting-time premiums, vacation or holiday pay, or discretionary bonuses. Each of these exceptions have their own specific requirements and employers should consult with a labor and employment attorney for any questions on these exceptions. If an employee earns only an hourly wage, the regular rate likely would be the hourly wage.
However, if there are additional payments, the regular rate is calculated by dividing all earnings (excluding those payments mentioned above) by the total number of hours actually worked. This provides a fairly simple equation: all weekly earnings / all hours worked = regular Rate. Once calculated, employees are then generally entitled to compensation at 1.5 times all hours worked in excess of 40 hours in a workweek. Oftentimes, employers will calculate overtime by first paying the regular hourly wage for all hours worked, including overtime, and then paying an overtime premium at one-half the regular rate for all overtime hours worked.
California generally follows the federal rules with a few exceptions and nuances. For example, overtime pay must be paid for all hours worked in excess of eight hours in any workday and 40 hours in any workweek, and on the first eight hours worked on the seventh consecutive day of work in any workweek. California also provides for double the regular rate for all hours worked in excess of 12 hours in any workday and for all hours worked in excess of eight on the seventh consecutive day of work in a workweek. Notably, the California Division of Labor Standards Enforcement (DLSE) Manual puts forth a formula which is not considered a formal regulation, but can be persuasive authority for California courts.
In a final blow to employers, the court determined that its holding would not only be given prospective application, but would apply retroactively.
What This Means For Employers
First and foremost, you must review your policies and pay practices because the decision will apply retroactively, potentially subjecting you to penalties and liability based on past practices. This is especially important if you have operations in multiple states besides California and have centralized payroll operations that rely upon federal FLSA standards.
Also, the court expressly limited its decision to flat-sum bonuses as opposed to other kinds of non-hourly compensation, such as production bonuses, piece work, and commissions, in which a “different analysis may be warranted.” However, the opinion could be used by employee advocates to raise meritless arguments that any non-hourly compensation is subject to the special rules for calculating overtime for flat sum bonuses outlined by the court. For these reasons, immediate compliance has now taken on added importance.