Is Your Employer Correctly Calculating Your Overtime Rate?

In a decision in March, the California Supreme Court held that when calculating the overtime rate in pay periods where an employee earns a flat sum bonus, employers must divide the total compensation earned in a pay period by the non-overtime hours worked by an employee, ignoring any overtime hours worked.

The Court’s recent decision in Alvarado v. Dart Container Corp., 2018 Cal. LEXIS 1123 (Cal. Mar. 5, 2018) changed how overtime is calculated. In Alvarado, Dart Container paid an attendance bonus of $15.00 per weekend day to employees who worked on a Saturday or Sunday and completed the full shift. This flat sum bonus was paid regardless of whether the employee exceeded the normal work shift hours. The Alvarado Court had to decide how to calculate the employee’s overtime rate in light of the flat sum bonus.

Dart argued that its formula for calculating overtime complied with federal law. Dart argued it complied by (1) multiplying the number of overtime hours by the employee’s straight time (called the “base” rate); (2) adding the total hourly pay for non-overtime work, any non-hourly compensation, and the base hourly pay for overtime work from step one; (3) multiplying the total from Step 2 with the overtime hours during the relevant pay period (called the “premium”); and (4) adding the base rate from step one with the premium from step three to get the total overtime compensation for the pay period. In addition, Dart argued that the DLSE regulation Plaintiff relied on was a void “underground regulation” and, because there was no existing valid state regulation, the formula used by the federal Department of Labor applies. That formula includes all hours in the divisor.

However, the Plaintiff argued that this formula violated the law because, according to the DLSE Manual, the flat sum bonus should be calculated using only the number of non-overtime hours worked.

The California Supreme Court agreed with the Plaintiff and relied on an outdated DLSE Enforcement Manual that said: “If the bonus is a flat sum, such as $300 for continuing to the end of the season, or $5.00 for each day worked, the regular bonus rate is determined by dividing the bonus by the maximum legal regular hours worked during the period to which the bonus applies.” While the Court agreed with Dart that the DLSE rule was an invalid underground regulation, it held that the regulation could be a persuasive application of state law.

Furthermore, the Court found that because Dart paid the flat sum bonus regardless of whether an employee worked any overtime hours on that weekend day, it should be applied to non-overtime hours in the pay period. Effectively, the Court adopted the DLSE regulation. The Court held that its decision should apply retroactively but expressly limited the holding to flat sum bonuses.

Although Alvarado modified how employers calculate certain overtime pay, the resulting difference in pay between the two formulas is often minimal unless an employee receives a large number of flat sum bonuses. Below is an example illustrating the difference between the two formulas.

Example:

Employee A works an 8-hour shift each day from Monday to Saturday, totaling 48 hours–40 regular hours and 8 overtime hours.  Employee A is paid $20 per hour and earns a $40 attendance bonus for the Saturday shift.  For purposes of determining Employee A’s regular rate of pay, the $40 bonus is divided by the total non-overtime hours worked (40 hours) for an additional per-hour value of $1.00, giving the employee a regular rate of $21.00.

Employee B, on the other hand, works only a 10-hour shift Monday and Saturday, totaling 20 hours–16 regular hours and 4 overtime hours.  Employee B is paid $20 per hour and earns a $40 attendance bonus for the Saturday shift.  For purposes of determining Employee B’s regular rate of pay, the $40 bonus is divided by the total non-overtime hours worked (16 hours) for a per-hour value of $2.50, giving the employee a regular rate of $22.50.

If the bonus were divisible by all hours worked (as permitted by the FLSA), the per-hour value of the bonus would be $0.83 for Employee A (not $1.00) and $2.00 for Employee B (not $2.50).  And, if the bonus were divisible by all potential non-overtime hours (i.e., 40 hours), the per-hour value for both Employee A and Employee B would be $0.38.  The method selected by the court, therefore, provides for a greater per-hour value (regular rate) than the FLSA method whenever overtime has been worked.