California Supreme Court Deviates From Federal Regulations on Calculating Regular Rate of Pay on Flat Rate Bonuses

by Brian J. Mills and Anne E. Dwyer

On March 5, 2018, the California Supreme Court decided Alvarado v. Dart Container Corp., and formally diverged from the federal regulations on calculating overtime for flat rate bonuses. Under both federal and California law, an employer must pay employees overtime based on their “regular rate of pay.” The “regular rate of pay” includes not only an employee’s base hourly rate, but also any commission, bonuses and other non-discretionary pay the employee earns. Under the federal regulations, when an employee earns a bonus, the regular rate is calculated by dividing the employee’s total compensation (including bonuses) by the employee’s total hours worked (including overtime hours). Based on Alvarado, however, employers in California must use a different calculation, at least for flat rate bonuses.

In Alvarado, the employer paid employees a flat $15 attendance bonus for each weekend day worked by the employee. The employer argued that when calculating the regular rate, it could divide the $15 bonus by the total hours worked by the employee during the week, including overtime hours, and multiply that by .5 to determine the overtime premium due on the bonus.

The Supreme Court, however, disagreed. According to the Court, to calculate an employee’s regular rate for the flat rate bonus, the bonus needed to be divided by the total number of non-overtime hours actually worked during the pay period and multiplied by 1.5 for all overtime hours worked. The Court stated the term “regular” in “regular rate of pay” refers to “regular time,” not overtime. Hence, only non-overtime hours could be considered. Further, the Court found that using the total hours worked as the divisor, as opposed to non-overtime hours, would result in the regular rate progressively decreasing as the number of overtime hours increases. For example, if two employees each have an hourly rate of $10 per hour and each earn the $15 attendance bonus, but one employee works 50 hours and the other employee works 60 hours, the employee who works 50 hours would have a regular rate of pay that is $10.30 ($500+$15=$515/50=$10.30) whereas the employee who works 60 hours would have a regular rate of $10.25 ($600+$15=$615/60=$10.25). The Court found this decrease in regular rate undermined the state’s policy of discouraging overtime work. 

The Court did not, however, address how bonuses other than flat rate bonuses, such as production bonuses or bonuses which are tied to the number of hours an employee works, should be calculated. Instead, the court acknowledged that calculation of such bonuses may be different. Nevertheless, employees are likely to rely on the Court’s reasoning in this case to argue that the regular rate calculations adopted by the Court apply to other bonuses and non-discretionary pay as well.