Darting Ahead: California Supreme Court Adopts New Formula For Flat Sum Bonuses

For decades, many employers across California relied upon established federal law governing the calculation of overtime compensation on bonuses. Under federal law, the same set of rules apply to flat sum bonuses (i.e., set bonus amounts that cannot increase with additional productivity or employee effort) and other bonuses.

That all changed earlier this month when the Supreme Court of California decided Alvarado v. Dart Container Corporation of California. The decision transforms the method for calculating overtime under California law when employees receive flat sum bonuses. The court's decision represents a significant development for employers that pay bonuses and will likely require employers operating in California using flat sum bonuses to revise their pay practices.

Background

Under California law, when an individual receives a nondiscretionary bonus, the bonus payment must be included in the employee's "regular rate of pay" for purposes of calculating overtime. The question in Alvarado was how this calculation should be made with respect to flat sum bonuses. The flat sum bonus at issue was a $15 attendance bonus that employees received when they worked weekend shifts.

The California Division of Labor Standards Enforcement (DLSE) has long taken the position that California requires a special, more expensive overtime calculation for flat sum bonuses. According to the DLSE, to protect against dilution as employees work more overtime, flat sum bonuses are to be divided only by straight-time hours and then multiplied by one-and-one-half (or two in the case of double time) to determine overtime premiums on these bonuses. By contrast, the DLSE opined bonuses that increase with more effort or production (for example, a $5 bonus for every 100 widgets made) could instead by divided by all total hours worked and multiplied by one half (or one in the case of double time) to determine the overtime premium owed.

Federal law, derived from the Fair Labor Standards Act, does not have any unique formula for flat sum bonuses. And until this ruling, the DLSE's position on flat sum bonuses was never actually endorsed by a California court. In fact, the court of appeal in Alvarado rejected the DLSE's position and applied federal law to flat sum bonuses. As a result, many employers relied on federal law to calculate overtime when employees received these bonus payments, using the larger divisor of total hours worked and thus resulting in smaller overtime...

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