Apr 23

# California Supreme Court Determines How to Compute Overtime When an Employee Earns a Flat Sum Bonus

Jasmin Daneshgar, Esq.

On March 5, 2018, the California Supreme Court issued its long-awaited decision on the method for calculating an employee’s overtime rate when an employee has earned a flat sum bonus during a single sum pay period. In Alvarado v. Dart Container Corporation of California (2018) 4 Cal. 5th 542, the Supreme Court ruled that the value of the flat sum bonus is determined by dividing the amount of the bonus by the total number of non-overtime hours actually worked during the relevant pay period and using 1.5, not .5, as the multiplier for determining the employee’s overtime pay rate.
The Court disagreed that the per-hour value of the flat sum bonus should be determined by dividing the amount of the flat sum bonus by the total number of hours the employee actually worked during the pay period, including overtime hours; or the number of overtime hours that exist in the pay period regardless of how many hours the employee actually worked. Using these alternate formulas, the Court found, would dilute the employee’s regular pay rate and overtime pay rate and thereby contradict the long standing principle that California labor laws must be liberally construed in favor of worker protection. It would also go against state policy discouraging the imposition of overtime work.
The Court provided the following example to illustrate the rationale for its holding:
A hypothetical employee earns \$15 per hour and works only on Saturdays. Like every other Saturday employee, he earns a \$15 attendance bonus by completing his weekend work shift, thus earning an additional \$30 in each two-week pay period. If his employer calculated the value of his \$30 bonus by 80 hours (i.e., the number of non-overtime hours that exist in the two-week period) instead of by 16 hours (i.e., the actual number of hours he worked), the per-hour value of his bonus would be \$.375 as opposed to \$1.875. This would decrease his regular rate of pay from \$16.875 to \$15.375 and thereby dilute his overtime pay rate.
In light of Alvarado and its retroactive application, California employers who include flat-sum bonuses as part of their compensation structure should immediately review how they calculate overtime to ensure compliance with state law.