California Supreme Court Provides Employers With Formula for Computing Overtime When an Employee Receives a Flat Rate Bonus

California Supreme Court Provides Employers With Formula for Computing Overtime When an Employee Receives a Flat Rate Bonus

By Arielle M. Rediger, Esq.

In Alvarado v. Dart Container Corporation of California, the employer was sued for improperly paying overtime due to its use of “attendance bonuses” that were given to employees for completing weekend shifts. The employer followed the federal method of accounting for the bonus in the employees’ overtime rates and allocated the bonus to all hours worked by the employee in the relevant pay period, including overtime hours. The plaintiffs argued the bonus should have been only allocated to nonovertime hours worked during the relevant pay period, which is the method endorsed by California’s Division of Labor Standards Enforcement (“DLSE”). Both the trial court and Court of Appeal approved of the employer’s method.

The California Supreme Court held that the correct overtime rate of pay for an employee who receives a flat sum bonus is to divide the amount of the bonus by the total number of nonovertime hours actually worked by the employee during the relevant pay period, then multiply the result by 1.5. This formula must be used when the amount of the bonus does not change depending on the number of hours the employee works.

Importantly, the California Supreme Court announced its decision applies retroactively, which means a California employer that has been paying flat sum bonuses to its employees without determining overtime rates using the method described above faces potential liability. California employers should review their payroll practices to ensure compliance with this methodology and take steps to cure any instances where overtime pay was miscalculated.