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California adopts employee-friendly calculation for including flat bonus in ‘regular rate’ of pay for overtime

By Lorene D. Park, J.D.

In a putative class action under state law, the California Supreme Court has held that in determining an employee’s regular rate of pay, which included a flat sum attendance bonus for working unpopular weekend shifts, the divisor used to calculate the per-hour value of the bonus should be the number of nonovertime hours actually worked during the pay period. The divisor should not also include overtime hours worked, which would result in a lower regular rate of pay (and thus overtime pay). The appellate court’s conclusion otherwise was reversed (Alvarado v. Dart Container Corporation of California, February 5, 2018, Cantil-Sakauye, T.).

The plaintiff in this putative class action seeking overtime pay under the California Labor Code (among other claims) worked as a warehouse associate from September 2010 to January 2012. Each putative class member was allegedly paid on an hourly basis and, in addition to normal hourly wages, received an “attendance bonus” if he or she was scheduled to work a weekend shift and completed the full shift. The amount of the bonus was a flat sum of $15 per day of weekend work, regardless of whether the employee worked in excess of the normal work shift on the day in question. The dispute in this case arose because the attendance bonus must be factored into an employee’s regular rate of pay so that the employee’s overtime pay rate (generally, 1.5 times the regular rate of pay) reflects all the forms of regular compensation the employee earned.

Employer’s calculation. The employer calculated the amount of overtime paid on attendance bonuses in a pay period as follows. Step one was to multiply the number of overtime hours worked in a pay period by the straight hourly rate (”base” hourly pay for overtime work). In step two the employer calculated the employee’s regular rate of pay for the period by first adding (a) the total hourly pay for nonovertime work during the pay period; (b) any nonhourly compensation the employee earned in the pay period, including any attendance bonuses; and (c) the base hourly pay for overtime work from step one. The result was the “total base” pay for the period, including base compensation for overtime, which the employer divided by the total number of hours worked in the period, including overtime, to come up with the regular rate for the period. In step three, the employer multiplied the regular rate from step two by the total number of overtime hours in the period, then divided that amount by half. The result was what the employer considered the overtime “premium,” meaning the extra pay on top of normal pay. In step four, the employer added the base hourly pay for overtime work from step one to the overtime premium from step three to get the total overtime compensation for the period.

The employee wanted a different formula that would result in a higher “regular rate” of pay because it would divide the “total base” pay for the period in step two by only the number of nonovertime hours worked in the pay period.

Proceedings below. Moving for summary judgment, the employer argued that even though California law governing overtime wages is more protective of workers than federal law, the trial court should look, for “persuasive guidance,” to a federal regulation explaining how to factor a flat sum bonus into an employee’s regular rate of pay. The only California regulation on point, asserted the employer, was an enforcement policy in the Division of Labor Standards Enforcement (DLSE), which didn’t have the force of law. Siding with the employer, the trial court found, and the appeals court affirmed, that there was no California law specifying a method for computing overtime on flat sum bonuses, and the employer’s formula had complied with federal law that does provide a formula for calculating bonus overtime.

“Regular rate of pay.” Reversing, the state high court noted California’s longstanding policy of discouraging employers from imposing overtime work. Subject to exceptions not relevant here, employers must pay an overtime premium for work in excess of eight hours in a day, and 40 hours in a week, or for any work at all on a seventh consecutive day. These requirements are more protective than federal law, explained the court, and it is well settled that federal law does not preempt state law in this area, so state law is controlling to the extent it is more protective. The court also noted that California laws are to be “liberally construed in favor of worker protection.”

Important here, an employee’s “regular rate of pay” for purposes of Section 510 and Industrial Welfare Commission (IWC) wage orders is not the same as the employee’s straight time rate (i.e., normal hourly wage rate). Regular rate of pay, which can change from pay period to pay period, includes adjustments to the straight time rate, reflecting, among other things, shift differentials and the per-hour value of any nonhourly compensation. The flat sum attendance bonus here was incentive pay for working unpopular shifts, was part of the overall compensation, and its per-hour value had to be determined so the regular rate of pay reflects all forms of regular compensation earned in a pay period.

Divisor in calculating regular rate only includes nonovertime hours. Ultimately, the California Supreme Court held that the divisor for purposes of calculating the per-hour value of the flat sum bonus should be the number of nonovertime hours actually worked during the pay period. It should not include overtime hours worked.

The court found that the lower court’s assertion that there is no state law to construe was “simply incorrect.” Both the California Labor Code Section 510 and Wage Order No. 1 require the payment of an overtime premium based on an employee’s “regular rate of pay.” The court also discussed the DLSE interpretive policy. The deference normally given an agency interpretation was lacking because it was published without following administrative procedures. But that did not mean the interpretation was wrong, and “a court that is exercising its independent judgment should certainly take the agency’s interpretation into consideration, having due regard for the agency’s expertise and special competence.” The DLSE manual addressed the question here, stating: “If the bonus is a flat sum, such as $300 for continuing to the end of the season, or $5.00 for each day worked, the regular bonus rate is determined by dividing the bonus by the maximum legal regular hours worked during the period to which the bonus applies. This is so because the bonus is not designed to be an incentive for increased production for each hour of work; but, instead is designed to insure that the employee remain in the employ….”

In agreeing with the DLES’s policy, the state high court also concluded that “the employer’s formula—using total hours, including overtime hours, as the divisor when determining the per-hour value of a flat sum bonus—must be rejected because it results in a progressively decreasing regular rate of pay as the number of overtime hours increases, thus undermining the state’s policy of discouraging overtime work.”

Nonovertime hours actually worked. The court also rejected a calculation that would have the divisor be the number of nonovertime hours that exist in a pay period. To allow that would permit employers to dilute the value of the flat sum bonuses that part-time employees earned, fictionally treating those bonuses as if the part-time employees were working full-time.

Based on the foregoing, and finding no reason to apply its decision only prospectively (as urged by the employer), the court concluded that the “flat sum bonus at issue here should be factored into an employee’s regular rate of pay by dividing the amount of the bonus by the total number of nonovertime hours actually worked during the relevant pay period and using 1.5, not 0.5, as the multiplier for determining the employee’s overtime pay rate.”