As many business owners are aware, the California Supreme Court recently threw employers a serious curveball with respect to how employers must calculate overtime. Adding to the confusion, the Court stated employers should have been aware of this calculation method even though the same California Supreme Court declared it void over 20 years ago.
In Alvarado v. Dart Container Corp of Cal., the Court fundamentally transformed how California employers are to calculate the “regular rate of pay” for overtime purposes when non-exempt employees receive a flat sum bonus that is not overtly linked to performance/production incentives (think attendance and longevity bonuses).
Federal law requires employers to pay overtime based on an employee’s “regular rate of pay,” which is often the same as the employee’s normal hourly rate of pay. However, when an employee works at different hourly rates during the same workweek (such as with the case of shift differentials) or receives certain types of compensation in addition to an hourly rate of pay (such as a bonus), the employee’s hourly rate and “regular rate” typically will not be the same. When an employer provides includable bonus compensation to an employee, the federal standard calculates regular rate by dividing the total compensation earned by the total hours worked during the relevant time period.
Dart Container veers sharply away from this method. Generally speaking, an employee’s “regular rate of pay” must now be calculated differently in California than anywhere else in the country — and this ruling is retroactive. Under the new California law, “regular rate” for certain, flat-sum, non-performance related includable bonuses now uses only an employee’s non-overtime hours in the denominator and overtime must be paid on the bonus separately from the normal hourly compensation.
In other words, what Dart Container means for California employers is that if you have paid certain flat-sum bonuses to non-exempt California employees and made adjustments to the regular rate and overtime based on the always-accepted approach (instead of the previously “void” approach), you have been doing it wrong.
Given the wage and hour and class action climate prevailing in California, this sudden change should have employers’ attention, and those that have paid any type of bonus to non-exempt employees in California should seek immediate counsel.