Overdue Clarification: California Supreme Court Explains How Employers Must Calculate the Value of a Flat Bonus for Purposes of Overtime Compensation

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In Alvarado v. Dart Container Corp., decided on March 5, 2018, the California Supreme Court settled the issue of how a company, in accordance with California Labor Code section 510, should calculate an employee’s overtime pay rate when the company has paid a flat sum bonus during a single pay period.  For reasons based on California policy protecting employees from overtime exploitation, the Court held that such a bonus should be assigned an hourly value by dividing the bonus amount by the number of non-overtime hours worked in the pay period, and that hourly value should then be multiplied by the number of overtime hours worked and by 1.5.  This amount would then be added to the non-bonus overtime pay.

In coming to its decision, the Court reviewed the fine points of what weight courts should give to an administrative agency’s “void underground regulation,” that is a policy interpreting a statute that functions as “a rule that must be followed prospectively, and that is not announced in the context of resolving a specific case,” and as to which the agency did not follow the Administrative Procedure Act rule-making process.  The Court’s guidance is that, while such a regulation is not entitled “any special weight or deference,” it is “something a court may consider, and assuming the court is persuaded that the agency’s interpretation is correct, the court may adopt it as its own.”

In her concurring opinion joined by three other Justices, Chief Justice Cantil-Sakauye was critical of California’s Division of Labor Standards Enforcement (DLSE), the agency tasked with adopting regulations to interpret wage and hour laws under the Labor Code.  She noted that the DLSE “could, and … should, have” dispelled some of uncertainty around the issue addressed by the Court, by promulgating an interpretive regulation sometime in the prior two decades.  Had the DLSE promulgated such regulations, employees and employers would have had “a more robust basis . . . to structure their affairs,” and employers could have avoided the prospect of substantial penalties for the miscalculation of overtime pay.

Turning to the overtime calculation issue, the Court held that the bonus should be “treated as if it were fully earned by only the nonovertime hours in the pay period, and therefore only nonovertime hours should be considered when calculating the bonus’s per-hour value.”  Accordingly, in calculating overtime pay, the hourly value of an attendance bonus paid to an employee during a pay period should be calculated by dividing the amount of the bonus by the number of nonovertime hours actually worked during the pay period.  That hourly value would then be multiplied by 1.5, and added to the amount of non-bonus overtime pay.

Two “overarching interpretive principles” supported this decision: first, the state’s “policy favoring an eight-hour workday and a six-day 40-hour workweek, and discouraging employers from imposing work in excess of those limits,” as reflected in the requirement that employers pay a premium for overtime work; and second, the liberal construction in favor of employee protection that is to be accorded California’s labor laws.  Because the attendance bonus at issue in Alvarado was a flat sum, it did not “reward the employee ‘for each hour of work,’” i.e., it did not increase for each hour worked.  It is not like piecework compensation, which does increase in rough proportion to the hours worked and therefore, arguably, should, like a base pay, be divided by the number of overtime and regular hours worked.

Employers now have the clarity to assure that they include the proper hourly rate of a flat bonus in calculating overtime pay for a pay period.

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