Overtime pay in California is based on the employee’s “regular rate of pay,” which is not always an employee’s normal hourly wage and must include almost all forms of pay that the employee receives.

Yesterday, the California Supreme Court ruled that an employer must calculate the regular rate of pay by dividing the employee’s total compensation by the number of non-overtime hours an employee worked during the pay period, rather than the total number of hours the employee worked, including overtime hours (Alvarado v Dart Container Corporation of California).

Many of you may pay your employees a premium for working on a weekend or a night shift and you should be aware of this distinction in the law.   Others may pay a “make up amount” to compensate workers who have changed from a daily or weekly rate to an hourly rate and have a separate line to increase their pay to meet a minimum payment.  It may be subject to increased overtime rates as well.  This may eventually extend to housing or other items that are considered part of the regular compensation package.  It may all need to be included at some point as this ruling evolves.

In the case, Dart Container Corporation of California, 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 the weeks that he earned the weekend attendance bonus.

The employee argued that overtime pay on any flat sum bonus should be divided only by the “regular” hours he worked that week (the method in the Division of Labor Standards Enforcement [DLSE] manual), not by the “total” hours worked during the week (regular hours plus overtime hours worked, the federal formula). For example, to determine the employee’s regular rate of pay, you would divide 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.

The California Supreme Court unanimously reversed the lower court and approved the DLSE method of calculating the regular rate of pay when a flat sum bonus is involved: Employers must divide the employee’s total compensation by the employee’s non-overtime hours worked (not by the total hours worked).

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

The Court also decided that this ruling should apply retroactively, not just going forward.

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

We strongly urge employers who want to give “extra pay” to hourly workers should consult legal counsel.

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