News & Events

March 9, 2018

California Supreme Court Clarifies Overtime Calculation for Non-Exempt Employees Who Receive Flat Sum, Non-Discretionary Bonuses

By: Daniel Handman and Benjamin J. Treger

Non-Discretionary Bonuses & Overtime: The Basics

How are bonuses factored in to an hourly, non-exempt employee’s Regular Rate of Pay for the purposes of calculating overtime?  With truly discretionary bonuses, the answer was easy: they are not factored in at all.  But for flat sum non-discretionary bonuses the answer was less clear.

Should an employee who receives a flat sum non-discretionary bonus for 48 hours of work in a particular week receive overtime based on the 40 regular hours they worked or the 48 hours, including overtime, that they worked?

The Alvarado Decision

On March 5, 2018, the California Supreme Court provided some clarity on the issue in Alvarado v. Dart Container Corporation of California, holding that the per-hour value of the bonus is calculated by dividing it into the number of nonovertime hours worked by the employee in a particular pay period, as opposed to the number of hours actually worked inclusive of overtime hours.

Prior to the California Supreme Court’s ruling, employers could look to two conflicting authorities on how to approach this calculation: California’s Division of Labor Standards Enforcement (DLSE) which interprets California law to require division by the number of nonovertime hours, and the U.S. Department of Labor (DOL) which divides by the number of hours the employee actually worked, including overtime hours.  By using a smaller divisor, DLSE’s interpretation is more favorable to the employee.

These conflicting authorities competed against one another at the trial and appellate levels.  The trial court sided with Dart holding that because the DLSE’s view was premised on its Enforcement Manual, (which was non-binding because it was not adopted in compliance with the Administrative Procedure Act (“APA”)), there was no valid California law on the matter, such that the relevant federal (DOL) regulation could be followed.  The Court of Appeal affirmed adopting the same reasoning.

The California Supreme Court, however, reversed the lower courts.  Despite agreeing that the DLSE Enforcement Manual’s regulation of this matter was void, it held that the DLSE’s interpretation of the underlying law was nevertheless correct.

The California Supreme Court reasoned that because California’s policy is to favor an eight-hour workday and 40-hour workweek, as well as to construe laws liberally in favor of worker protection, the appropriate interpretation in this instance is to use only nonovertime hours as the divisor when apportioning a flat sum non-discretionary bonus to calculate an employee’s regular rate.

Notably, the California Supreme Court held that this decision, because it did not alter law but merely interpreted existing law, applies retroactively.  Consequently, employers may face substantial penalties for prior noncompliance.

What This Means For You

California employers who pay flat sum non-discretionary bonuses to non-exempt employees now have clear guidance on how to calculate overtime for those bonuses.

Employers calculate the overtime compensation attributable only to the employee’s hourly wages by multiplying the employee’s straight time rate by 1.5 and then by the number of overtime hours.  With regard to the bonus, employers calculate the overtime compensation attributable to that by taking the value of the bonus (B), diving that by the number of regular, nonovertime hours worked (RT), and then multiplying that per-hour value by 1.5 and by the number of overtime hours worked (OT).  (B/RT) x OT x 1.5.

Employers should consult with their employment law counsel and review their pay practices to ensure that they are in compliance.

For more information, please contact Dan Handman at DHandman@hkemploymentlaw.com or Benjamin J. Treger at BTreger@hkemploymentlaw.com