Overtime Calculations in California: California High Court Favors an Expansive Formula and Declines to Follow Federal Precedent

On March 5, 2018, the Supreme Court of California ruled that employers must follow a more generous state formula for calculating overtime pay where employees receive flat sum bonuses. In Alvarado v. Dart Container Corp., the Court held that the overtime premium on any bonus or other form of compensation paid out on a flat-rate basis must be calculated by dividing the total amount of the flat-rate bonus by the number of non-overtime hours worked by the employee during the pay period.

This is different from the calculation used under the federal regulations, which divides the flat-rate bonus by all hours worked during the workweek (including all overtime hours). The California formula will result in a higher regular rate of pay calculation and, therefore, higher overtime pay for employees. While in some cases, the differences in these amounts may be relatively small, a failure to properly calculate the overtime premium on employee bonuses could result in very costly class litigation in California.

Given this ruling, companies with employees in California should review the formula they use for calculating overtime pay in the “golden” state to ensure ongoing wage and hour compliance. If you have any questions about this decision and how it may impact your business, please contact one of Honigman’s Labor and Employment attorneys.