Last week the California Supreme Court issued a unanimous decision in Alvarado v. Dart Container Corporation of California, wherein putative class members claimed Dart failed to properly pay overtime.  More specifically, the parties and the Court grappled with how to calculate the regular rate of pay (i.e., the rate by which the employer must multiply the overtime hours worked) when there is flat-sum bonus paid during a workweek.  Should an employer (1) divide a workweek’s total wages by all of the hours worked during the relevant workweek, including overtime hours, or (2) divide the total wages only by the non-overtime hours? 

The Court held when calculating overtime in pay periods that include a flat-sum bonus, such as an attendance bonus, an employer must divide total compensation for that pay period by only the non-overtime hours worked by an employee.  This calculation, as opposed to the other, would then result in numbers slightly more beneficial to employees.  

In reaching this conclusion, the Court adopted the position set forth in the Department of Labor Standards Enforcement (DLSE) Manual, which stated, “if the bonus is a flat sum, such as $300 for continuing to the end of the season, or $5.00 for each day worked, the regular bonus rate is determined by dividing the bonus by the maximum legal regular hours worked during the period to which the bonus applies.”  The Court’s decision breaks with how overtime is calculated under the federal Fair Labor Standards Act (FLSA).

This ruling may have far-reaching implications for employers that provide flat-sum bonuses to their non-exempt employees, and who have been using the FLSA formula to calculate overtime rates for California-based non-exempt employees.  Employers are encouraged to work with their payroll teams and/or employment counsel to ensure overtime rates of pay for employees receiving flat-sum bonuses in any given workweek are being calculated correctly.    

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Lois M. Kosch

Emily J. Fox