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California Supreme Court Decides How to Pay Overtime on Flat-Sum Bonus

For employers who give their employees flat-sum bonuses, the California Supreme Court just clarified exactly how to calculate overtime pay for those workers.

In the Golden State, overtime pay is based on the employee’s “regular rate of pay” — a rate that may not solely consist of an employee’s normal hourly wage, as it must include almost all forms of pay the employee receives. But how do you calculate the regular rate of pay when an employee receives both an hourly wage and a flat-sum bonus — such as an extra $15 for working a weekend shift?

​There are two possible calculations: dividing the flat-sum bonus only by the “regular” hours worked in a week, which is the method used in the Division of Labor Standards Enforcement (DLSE) Enforcement Manual; or dividing the flat-sum bonus by the “total” hours — regular plus overtime — worked during the week, which is the federal formula.

​​But on March 5, the California Supreme Court held that employers determining the regular rate on a flat-sum bonus must divide the bonus amount by the employee’s number of non-overtime hours worked. Using this method instead of the total number of hours worked (including overtime hours) provides the per hour value of the flat-sum bonus to use in calculating the regular rate of pay (Alvarado v. Dart Container Corp. of California​, 411 P.3d 528 (2018)).

Employee Received Flat-Sum Attendance Bonus

Dart Container Corp. of California, which manufactures food service products such as cups and plates, allegedly maintained a policy of paying a flat “attendance bonus” of $15 per day to employees who worked Saturday and Sunday shifts, regardless of the number of hours worked on the weekend shift.

An employee sued, claiming he was improperly paid overtime during weeks he earned the attendance bonus, and that overtime pay on any flat-sum bonus should be divided only by the “regular” hours he worked that week — the DLSE method. For example, you would divide the flat-sum bonus only by 40 regular hours instead of 48 total hours (regular hours plus overtime hours). This would result in a higher regular rate of pay and, thus, a higher overtime rate.

In 2016, the court of appeals followed the federal formula for calculating overtime on flat-sum bonuses and rejected the DLSE method. The lower court found that the division's manual is only guidance — not legally binding — and that California had no controlling law.

But the high court agreed with the employee.

High Court Approves DLSE Method

The California Supreme Court unanimously reversed the lower court’s decision.

The Court approved the DLSE method of calculating the regular rate of pay when a flat-sum bonus is involved; employers must divide the bonus by the employee’s non-overtime hours worked (not by the total hours worked). This provides the per-hour value of the bonus, which is multiplied “using 1.5, not 0.5, as the multiplier for determining the employee’s overtime rate.” The multiplier will be 1.5 for time and a half and 2.0 for double time.

The Supreme Court reasoned that a flat-sum bonus is not tied to the number of hours worked — the $15 will be paid when an employee picks up a weekend shift, regardless of how many hours the employee worked that week. Because the flat-sum bonus was payable even if the employee didn’t work overtime, only the non-overtime hours should be considered when calculating the regular rate of pay.

The Supreme Court also based its ruling on two other policy factors:

  • California law requires premium overtime pay, which is meant to discourage employers from imposing overtime work; and

  • California labor laws are interpreted liberally in favor of worker protection.

Calculation Example

An employee earning $12 per hour worked 50 hours in a workweek (40 hours of straight time and 10 hours of overtime). The employee also received a $20 flat-sum bonus for working a weekend shift. Using the Supreme Court’s method, the employee’s wages for the week would be calculated as follows:

  • Total non-overtime hours worked: 40

  • Flat-sum bonus attributable to the workweek: $20

  • Per hour value of bonus: $20 bonus ÷ 40 regular hours = $0.50

  • Overtime value of the bonus: $0.50 x 1.5 = $0.75 x 10 overtime hours = $7.50

  • Total earnings due for the workweek:

  • Straight time: 40 hours at $12/hour = $480

  • Overtime: 10 hours at $18.00/hour = $180

  • Bonus: $20

  • Overtime on bonus: $7.50

Total wages: $687.50 ($480 + $180 + $20 + $7.50)

Tough Decision

The California Supreme Court was presented with an employer who was seemingly trying to do the right thing — give its employees a bonus and take that bonus into account when calculating overtime pay. The employer relied on a commonly used federal formula to calculate the regular rate of pay, and there was no specific controlling state law on the issue.

Despite these efforts, however, the court ruled against the employer.

The employer asked the court to apply the decision going forward — arguing that it would be unfair to hold the employer liable when no statute specifically addressed the flat-sum bonus calculation.

Unfortunately, the court determined that the employer should not be given a “free pass” and that its holding would apply retroactively, not just going forward.

Interestingly, the Supreme Court held that the DLSE Enforcement Manual is a void underground regulation and not entitled to any deference. Despite this, the court held that it could consider the DLSE’s interpretation of the law if it was independently persuaded that the DLSE’s interpretation was correct — and in this case, the court was persuaded.

This leaves employers in a truly unfortunate predicament. The DLSE will continue to interpret and enforce state labor laws, but an employer will not know in advance whether the courts will uphold the DLSE’s interpretations. Instead, an employer may be subject to a retroactive interpretation and be forced to pay penalties and/or damages, as was the case for Dart Corp.

Businesses need more certainty that they’re correctly applying the law and shouldn’t be left to guess, a predicament that Chief Justice Tani Cantil-Sakauye recognized in her concurring opinion.

“Prior to today’s decision, the spare language of the pertinent state authorities could have left employers that fully intend to comply with state overtime laws somewhat uncertain about how to proceed — with the result that employers may be subject to penalties because the formal rulemaking process was not followed,” she said. “Regrettably, more was not done to help employers meet their statutory responsibilities, or to ensure that employees receive the overtime pay they are due.”

Best Practices
  • This decision is expressly limited to non-discretionary flat-sum bonuses, but we may see employees argue that it should apply to other types of extra compensation.

  • ​When paying overtime, remember to include all forms of wages — commissions, bonuses, piece rates, etc. — when calculating the employee's “regular rate of pay.”​

  • Review your pay practices when hourly employees receive bonuses or other compensation to make sure you are in compliance.

  • Consult legal counsel if you want to give “extra pay” to hourly workers to make sure you’re paying employees properly. Not all bonuses are treated equally.

  • Use caution when relying on DLSE interpretations, particularly those that lack citations to California codes or regulations. Although the interpretations are a good indication of how the DLSE will use its enforcement powers, seek legal counsel when the basis for the DLSE's opinion is unclear.

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