Earlier this week, the California Supreme Court dove into that most important legal subject: basic math. The case of Alvarado v. Dart Container Corp. centered on what the denominator should be when calculating the regular rate of pay, which is in turn used to calculate the overtime pay for employees receiving a flat sum attendance bonus. As all employers should know, the regular rate of pay is calculated based on “all remuneration” for employment, with certain limited exceptions. Non-discretionary bonuses, such as the attendance bonus at issue in this case, must be included in the regular rate of pay. While this case interprets California policies regarding regular rate of pay calculation, regular rate of pay is a federal requirement and affects employers in all states, including California and Nevada. A U.S. Department of Labor Fact Sheet on the topic of regular rate of pay can be found here. Under federal law, the regular rate of pay is generally determined by dividing the total remuneration for employment in a workweek by the total number of hours actually worked. However, on March 5, 2018, the Court found in favor of the Plaintiff and adopted the employee-friendly method found in the California DLSE Enforcement Manual, rejecting the federal method promoted by the employer.
What sets this case apart from so many others is that Dart actually paid overtime on the bonuses involved. However, the Plaintiff claimed Dart included too many hours in its calculation of the hourly bonus rate in order to pay overtime owed for the bonus, which resulted in an underpayment of overtime to employees. When Dart calculated the hourly bonus rate, it divided the bonus amount by the total hours worked during the workweek, including overtime hours. As mentioned above, this method is found in federal regulations on overtime compensation for bonus payments. The Plaintiff argued that only regular hours should be used in that calculation, and the Court agreed.
The Court held that the non-overtime hours actually worked should be used to calculate the overtime rate for the bonus in question, as opposed to total hours (regular and overtime) or the maximum possible regular hours (40 hours per week). The reasoning rested largely on California public policy. The Court noted that the intent of the overtime laws is to discourage employers from requiring overtime work. By using a smaller denominator in the calculation, the overtime rate will be greater and it will become more expensive for employers to require overtime work. It also results in greater pay to employees, which is consistent with the oft-stated idea that the Labor Code should be interpreted broadly for the benefit of employees.
There are limits to the extent of this holding. The Court stated, “We limit our decision to flat sum bonuses comparable to the attendance bonus at issue here.” The attendance bonus was a fixed amount paid for weekend work. The amount stayed the same regardless of how many hours were worked on the weekend days or during the workweek. There was also no tie to productivity or anything related to the actual performance, quality or quantity of the work. The Court went on to state that other types of compensation like production bonuses, piecework, and commissions may increase based on the number of hours worked, so a different analysis may be warranted for those types of pay.
Advice for Employers
California employers should review their method of calculating overtime for bonus payments to determine whether past payments were done correctly in light of this case. The Court noted that its decision clarified existing law, so it is applicable retroactively. If the wrong denominator was used, the employer should pay the difference to employees. The actual difference in overtime pay when using the regular hours actually worked rather than the total hours worked will likely be minimal. However, employers should not ignore this holding because of the litany of penalties that could result from underpaying overtime, even by a few cents. Going forward, employers should be mindful of the type of bonus being paid and the proper method for calculating the correct overtime rate.
As mentioned, this case dealt with policies that are specific to California. It is unknown whether Nevada courts will look to Alvarado for guidance on regular rate of pay issues, but it is possible that they could adopt a similar approach to regular rate of pay calculation. Therefore, we recommend that employers outside of California consult with qualified legal counsel in their own states as to what implications, if any, this case might have for regular rate of pay policies and practices.
The case is Alvarado v. Dart Container Corp. (March 5, 2018) Case No.: S232507 and can be found here.
Excerpts from the DLSE Enforcement Manual discussing regular rate of pay and overtime payments for bonuses can be found here.