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A California Court Ruling May Change the Way Employers Calculate Overtime Pay for Some Employees

On March 5th,  the California Supreme Court (Alvarado v. Dart Container Corporation of California) held that employers who pay certain types of bonuses to non-exempt employees must apply a more generous calculation when determining how much overtime must be paid.  This decision does not affect exempt employees because they are not eligible for overtime.  Also, this decision only comes into play if and when a non-exempt employee works overtime and is paid a so-called non-discretionary bonus. 

For many non-exempt employees, particularly those who earn a single rate of pay, calculating the overtime premium is not difficult.  For example, if a non-exempt employee is always paid $15 per hour, the regular rate of pay is $15 per hour.  But the calculation becomes increasingly complicated whenever an employee earns non-discretionary bonuses, such as those paid to entice workers to accept less desirable shifts or for reaching productivity targets.  The reason is because non-discretionary bonuses will cause the regular rate of pay to increase, which then causes the amount of overtime pay to do the same.  It is essentially the same effect as a non-exempt employee who earns two different rates of pay and works overtime.    

New Calculation

Citing to the principle that California’s employment laws are to be applied in favor of worker protection, the state’s highest court ruled that employers who pay flat sum bonuses, such as $15 for working on a Saturday, must factor those bonuses into “an employee’s regular rate of pay by dividing the amount of the bonus by the total number of non-overtime hours  actually worked [also known as straight time] during the relevant pay period and using 1.5, not 0.5, as the multiplier for determining the employee’s overtime pay rate.”  This is a departure from federal law, upon which the employer in the Alvarado case mistakenly relied. The end result is marginally higher overtime pay to the employee.     

And just to make things interesting, the California Supreme Court held that this ruling applied only to flat sum bonuses, leaving open the possibility that a different formula may need to be applied to commissions or productivity or piecework bonuses.  Thus, the court’s attempt at clarifying a very complex issue appears to still be very much a work in progress.     

As this latest case demonstrates, paying bonuses to non-exempt employees carries significant legal risks even when employers make good faith attempts to comply with the law. Employers both in California and other parts of the country should continue to weigh the risks of paying non-discretionary bonuses to non-exempt employees versus simply increasing their hourly pay or applying other compensation strategies.

This is a complex area of wage and hour law. Therefore, employers should consider consulting with their HR adviser or employment lawyer for guidance.