In early March 2018, the California Supreme Court in Alvarado v. Dart Container Corp. issued an important overtime calculation decision for employers that pay recurring fixed bonuses to their hourly non-exempt employees. The specific facts of the Alvarado case involved a class action over computation of overtime on top of a weekend attendance bonus that was paid additional to work hours, but the principles of the decision would apply to other recurring flat ­sum bonuses or bumps. The Court considered the holding a clarification of existing law and thus applicable to non-discretionary flat pay arrangements prior to the decision.

The Court’s decision imposes a greater bonus overtime calculation under California law than federal law for recurring flat-sum bonus payments. The calculation is higher under California law than federal law in two key respects. First, California law restricts dividing the bonus by non-overtime hours worked up to 40 hours per week to calculate the bonus overtime regular rate. In contrast, federal law permits calculating the bonus overtime regular rate by dividing the bonus by all hours worked in the week or longer period covering the bonus. Second, federal law recognizes that the bonus covers the non-premium portion of all hours worked while the Alvarado court ruled that the bonus does not cover any part of the overtime worked and thus results in an overtime rate factor of 1.5x instead of 0.5x. As demonstrated by the example below, the California method yields a considerably larger bonus overtime calculation.

Example: Hourly non-exempt employee works 40 straight time and 20 overtime hours during the week and receives a weekly bonus of $500 in addition to straight and overtime pay.

Federal Calculation for Flat Bonus OT CA Calculation for Flat Bonus OT
Step 1: Divide $500 bonus by 60 total hours worked which equals $8.3333 bonus regular rate Step 1: Divide $500 bonus by 40 total hours worked which equals $12.50 bonus regular rate
Step 2: Multiply $8.3333 bonus regular rate by 0.50 OT rate factor which equals $4.1667 bonus OT premium since federal law treats the $500 bonus as covering the non-premium part of the OT hours Step 2: Multiply $12.50 bonus regular rate by 1.50 OT rate factor which equals $18.75 bonus OT rate since CA law prohibits the $500 bonus from counting toward any part of OT compensation.
Step 3: Multiply $4.1667 bonus OT premium portion by 20 OT hours which equals total bonus OT owed of $83.33 Step 3: Multiply $18.75 bonus OT rate by 20 OT hours which equals total bonus OT owed of $375
TOTAL BONUS OT OWED: $83.33 TOTAL BONUS OT OWED: $375.00

Consequently, employers with California work populations should be careful to avoid paying flat recurring bonuses or similar payments to avoid unintended increased costs.

For any questions about this alert, you may contact Joseph Scudiero, Senior Vice-President & Chief Labor Counsel, at 818.955.4335 or jscudiero@ep.com or Scott Bishop, Vice-President – Employment Law, at 818.955.4336 or sbishop@ep.com.