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

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On March 5, 2018, the Supreme Court of California declined to follow federal precedent and 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 “regular rate of pay” for any flat sum bonus must be calculated by dividing the total amount of the flat sum bonus by the number of non-overtime hours worked by the employee during the pay period applicable to the bonus. The calculated “regular rate of pay” is then multiplied by 1.5 or 2 (depending on the applicable overtime rate under California law) and the total number of overtime hours worked during the applicable pay period to get the total amount of overtime pay attributable to the bonus.

This is different from the calculation used under the federal Fair Labor Standards Act, which requires employers to divide the total amount of the flat sum bonus by all hours worked during the applicable pay period (including all overtime hours) to determine its “regular rate of pay.” Because the Fair Labor Standards Act considers the bonus to already account for payment for non-overtime work hours, employers are only required to pay an overtime premium equal to the total number of overtime hours worked multiplied by 0.5 of the bonus’s “regular rate of pay.” The California Supreme Court rejected using the Fair Labor Standards Act calculation for determining flat sum bonus overtime premiums under California state law. These differences can be summarized by the following formulae:

Fair Labor Standards Act
Bonus ÷ All Hours Worked = Bonus Regular Rate of Pay
Bonus Regular Rate of Pay x 0.5 x Overtime Hours = Bonus Overtime Premium

California
Bonus ÷ Non-Overtime Hours Worked = Bonus Regular Rate of Pay
Bonus Regular Rate of Pay x 1.5 or 2 x Overtime Hours = Bonus Overtime Premium

Example
Consider a non-exempt employee working 50 hours in a workweek who receives a $100 attendance bonus in the same workweek. An employee’s overtime compensation for the bonus alone would look like this under the two schemes, assuming only a 1.5x rate of overtime under California and federal law:

Fair Labor Standards Act Formula
Bonus Regular Rate of Pay
     $100 ÷ 50 hours = $2.00
Bonus Overtime Premium
     $2.00 x 0.5 x 10 hours = $10.00
Total Bonus Compensation
     $100 + $10 = $110.00
California Formula
Bonus Regular Rate of Pay
     $100 ÷ 40 hours = $2.50
Bonus Overtime Premium
     $2.50 x 1.5 x 10 hours = $37.50
Total Bonus Compensation
     $100 + $37.50 = $137.50

Practical Implications
As shown in the above example, the California formula will result in higher overtime pay for employees versus what they normally would be paid under federal law. While in some cases the differences in these amounts may be relatively small, a failure to properly calculate the overtime premium for employee flat sum bonuses could result in very costly class litigation in California. Critically, the California Supreme Court held that the use of its more generous method of calculation applies retroactively. Thus, California employers who have calculated flat sum bonus overtime premiums based on the Fair Labor Standards Act may be facing substantial back pay, penalties, and other liability.

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 and assess the scope of any potential back pay liability. 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.