California Supreme Court Departs From Federal Law in Overtime Calculations

March 8, 2018

Although most states follow federal law in calculating overtime and other wage and hour issues, California does not. The California Supreme Court reinforced this principle on March 5, 2018, when it held in Alvarado v. Dart Container Corporation of California that overtime pay attributable to an employer’s “flat sum” attendance bonus should be calculated by dividing the amount of the bonus by only the total number of non-overtime hours rather than by all hours worked, resulting in greater exposure for employers. This latest departure from federal law further illustrates that employers who operate in California must be closely attuned to the Golden State’s unique labor laws.

According to the opinion, Hector Alvarado worked for Dart as a warehouse associate in California. Alvarado and other non-exempt warehouse associates were paid on an hourly basis and received a flat sum attendance bonus of $15 if they completed a full shift on a Saturday or Sunday. Alvarado brought a class-action lawsuit against Dart alleging that it failed to properly calculate and pay overtime wages to him and similarly situated employees. He claimed that the formula Dart used for calculating an employee’s overtime compensation incorrectly computed the regular rate by dividing the amount of the bonus by the sum of all hours the employee worked, as opposed to dividing the amount of the bonus by only non-overtime hours actually worked.

Dart had followed the long-accepted methodology set forth in the federal regulations promulgated under the federal Fair Labor Standards Act (FLSA). Those regulations provide that the “regular rate of pay” for calculating overtime must be determined by dividing the sum of all remuneration by the total hours worked, including any overtime hours. Alvarado contended that employers should follow the methodology set forth in the California Division of Labor Standards Enforcement’s “Enforcement Policy and Interpretations Manual” (DLSE manual), which calls for calculating the regular rate of pay by dividing the bonus amount by only the non-overtime hours worked. For a full-time employee, this would be a maximum of 40 hours a week.

The trial court sided with Dart. It concluded that there was no valid California law or regulation explaining how to factor a flat sum bonus into an employee’s regular rate for purposes of computing and paying overtime wages. In reaching that conclusion, the trial court noted that the DLSE manual is not binding. In the absence of any binding California law or regulation on point, the trial court concluded that Dart was permitted to follow the relevant FLSA regulation methodology. The California Court of Appeal affirmed that ruling and reasoning.

California Supreme Court Ruling

The California Supreme Court reversed the lower courts and held that, in calculating the overtime attributable to the flat sum bonus, Dart should have divided the bonus amount by only the non-overtime hours worked. The high court agreed with the lower courts’ finding that the DLSE manual was not binding authority. However, the court believed that the DLSE’s interpretation of that controlling state law may be persuasive. The court also noted that it was obligated to favor an interpretation that gives effect to the principles that California law discourages employers from imposing overtime work (i.e., by making overtime as costly as possible) and that California’s labor laws should be liberally construed in favor of worker protections.

Thus, the court held that only non-overtime hours should be considered when calculating overtime owed on the flat sum weekend attendance bonus. It reasoned that, because the bonus is payable even if the employee works no overtime during the relevant pay period, it should properly be treated as if it were fully earned by only the non-overtime hours in the pay period. The court also noted that a contrary ruling would drastically dilute the value of the flat sum bonuses for part-time employees.

The court then held that, because the amount of the flat sum attendance bonus does not increase in rough proportion to the number of hours worked, it is more akin to a salary than to an hourly wage. Accordingly, when determining the employee’s overtime rate, the hourly rate attributable to the bonus should be multiplied by 1.5, not 0.5.

Finally, the court rejected Dart’s pleas that it would be unfair to impose this new rule retrospectively.

Consequences for Employers

Because the Alvarado decision applies retroactively, it calls into question whether employers’ prior calculations and payments of overtime wages attributable to flat sum bonus payments violate California law, even if they were made in compliance with the long-accepted FLSA methodology. Employers should immediately review any bonuses they pay (or have paid) to employees to determine whether they might be subject to attack under Alvarado. Employers not in compliance with the recent ruling should change their calculation methods and consider remedial measures such as back pay.

Fortunately for employers, and despite concerns that the Supreme Court would issue a broad interpretation of overtime calculations, Alvarado is limited to the specific factual scenario presented and to specific types of bonus payments. To that point, the court expressly limited its holding to flat sum bonuses that are akin in form and function to Dart‘s attendance bonus. That is, a flat sum (nonformulaic) bonus that rewards employees based on some metric that does not correlate to and reward the employee for each hour of work (such as completing a weekend shift). Bonuses that function as an incentive for increased production for each hour of work and therefore increase in amount as the number of hours worked increases, such as production or piecework bonuses or commissions, are not encompassed by this decision and may be calculated differently.

Notwithstanding the narrow ruling in Alvarado, the case serves as another reminder that employers operating in California who use uniform methods of payroll calculations based on federal law do so at their own peril. Alvarado illustrates that California courts often do not look to federal law or regulations as guideposts and will construe any ambiguity in California’s unique Labor Code favorably for employees. Thus, special attention to California payroll practices is necessary to ensure compliance.

For additional information regarding Alvarado and its impact on employer wage payment compliance obligations in California, please contact the authors or any other member of McGuireWoods’ Labor & Employment Department.