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When Flat Bonus Is Paid, California Overtime Rate of Pay Is Calculated Based On Non-Overtime Hours

Published by on April 16, 2018

California Supreme Court clarifies the proper overtime calculation for employees who earn a flat bonus and work overtime in the same pay period.

In California, non-exempt employees who work more than 40 hours a week, or 8 hours a day, are generally entitled to overtime at time-and-a-half their regular rate of pay for all hours worked over 40 in a week or 8 hours per day (or double the regular rate of pay for work in excess of 12 hours a day or in excess of 8 hours on a seventh consecutive working day). The overtime calculations can be difficult for employers—-particularly when other forms of compensation such as bonuses are involved, and the law is unclear about how to perform the proper calculations. The California Supreme Court recently clarified an ambiguity regarding how employers must calculate overtime when a flat bonus is awarded to an employee in the same week.

In Alvarado v. Dart Container, the California Supreme Court recently ruled that the divisor for calculating the regular rate of pay and the overtime attributable to the bonus is the number of non-overtime hours the employee worked in the pay period (typically 40 hours but could be less). The plaintiffs in Alvarado brought a class action alleging that Dart Container was miscalculating their overtime in connection with their flat rate weekend attendance bonus of $15.

Dart Container argued that California’s method should track the U.S. Department of Labor and federal regulations which uses total hours worked, including overtime hours, in the regular rate of pay overtime calculations. This method favors the employer because the larger the divisor, the lower the regular rate of pay and overtime premium rate.

The court rejected this method in favor of the method articulated by the Division of Labor Standards and Enforcement (DLSE). The DLSE formula instructs the employer to calculate compensation based on the employee’s regular hourly wages and overtime wages using the employee’s straight-time rate and overtime premium. Then, the overtime value of the flat bonus is added, which is calculated by dividing the per hour value of the bonus by the number of non-overtime hours worked, multiplied by 1.5. To make this easier to understand, an example is provided below.

This example shows the overtime calculation involving a flat rate bonus for a California employee with a straight-time rate of $12 per hour, who worked 48 hours in a week, and earned a flat attendance bonus of $30 for working a full 8 hour shift on a Saturday.

  • Regular Pay = $12 Straight-Time Rate x 40 Regular Hours = $480.00
  • OT Pay= ($12 Straight-Time Rate x 1.5 Premium) x 8 OT Hours = $144.00
  • OT Attributable To Bonus = ($30 Bonus / 40 Regular Hours) x 1.5 Premium = $1.125
  • OT Value of Bonus = $1.125 OT Attributable To Bonus x 8 OT Hours = $9.00
  • Total = $480.00 Regular Pay + $144.00 OT Pay + $9.00 OT Value of Bonus + $30.00 Bonus = $663.00

Under the Dart Container formula, which is permitted by federal regulation but ruled improper by the California Supreme Court, the employer determined the base hourly pay for both straight-time and overtime hours, then added the $30 attendance bonus to calculate the new regular rate, using total hours worked as the divisor. The new “regular rate” was then multiplied by 0.5 to calculate the overtime premium rate. The premium rate was then multiplied by the number of overtime hours worked as shown below:

  • Regular Pay = $12 Straight Time Rate x 48 Total Hours Worked = $576
  • Regular Rate = ($576 Regular Pay + $30 Bonus) / 48 Total Hours Worked = $12.625
  • OT Premium Per Hour = $12.625 Regular Rate x 0.5 Premium = $6.3125
  • OT Pay = $6.3125 OT Premium Per Hour x 8 OT Hours = $50.50
  • Total = $576 Regular Pay + $50.50 OT Pay + $30 Flat Bonus = $656.50

As becomes apparent when comparing the calculations, the DLSE method adopted by the court is slightly favorable to the employee.

Welter Insight

Employers in California should be aware of this ruling and update their payroll calculations accordingly, if necessary. The court expressly limited its decision to flat-sum bonuses as opposed to other kinds of non-hourly compensation, such as production bonuses, piece work, and commissions, in which a “different analysis may be warranted.” The opinion could, however, be used in the future by employees to raise similar arguments that any non-hourly compensation is subject to the special rules for calculating overtime for flat sum bonuses outlined by the court. For more resources on properly calculating overtime, employers can consult a Welter Law attorney.

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