Calculating overtime pay for employees can be somewhat complicated, especially in California. Now the state Supreme Court has issued a ruling that muddies the waters further with bonuses factored in.
(image courtesy Ken Lund/flickr)
On March 5, 2018 the California Supreme Court issued a decision in a employee lawsuit case Alvarado v. Dart Container Corp of Cal. The complaint centered on the proper method for calculating overtime rate of pay for nonexempt employees who receive “flat sum” bonuses, or bonuses that do not vary in amount and not based on employee variables such as productivity or efficiency. these flat sum bonuses include attendance bonuses, safety bonuses, and certification bonuses.
The plaintiff and other employees were paid an hourly wage but also received an “attendance bonus” as an incentive to work weekend shifts. As required by both California labor law and federal law, the employer - Dart Container - included the bonus into employees’ overtime rates for each pay period.
The employer’s approach was to add the total base hourly wages to bonus wages and dividing the sum by total hours actually worked, including overtime hours, to reach employee's regular hourly rate of pay was contested. This regular hourly rate of pay was multiplied by 0.5 to calculate the overtime premium to be paid for each overtime hour worked. Notably, this is the formula prescribed by the FLSA and is used by many California employers.
According to Lexology.com,
Alvarado proposed an alternative formula that combined the employee’s total base hourly wages with bonus wages and divided the sum by nonovertime hours worked to reach the employee’s regular hourly rate of pay. In Alvarado’s formula, the smaller denominator resulted in a higher regular rate of pay from which the overtime premium would be calculated.
The Supreme Court Concurred
The California Supreme Court's decision in this case will have a far-reaching impact for many employers in that it changes a fundamental calculating practice and is retroactive.
The court determined that when employers give a flat-rate bonus to nonexempt employee, the bonus must be factored into the employee’s regular rate of pay by dividing the amount of the bonus by the total number of non-overtime hours actually worked during the pay period. In addition, the court held that employers use 1.5, not 0.5, as the multiplier for determining their employee’s overtime rate of pay.
Being that this is a retroactive decision and holds out the prospect of costly penalties for noncompliance, it is important for employers in California to review their overtime pay and bonus practices.
What the Court Rejected
The California Division of Labor Standards Enforcement (DLSE) determined many years ago that “regular rate of pay” for these circumstances were to be based only an employee’s “non-overtime” hours, rather than all hours worked in the week. Then, 1996, the California Supreme Court ruled that this provision was a "void" regulation and determined that, because it was not adopted in compliance with proper legal procedure, it is not entitled to any deference by the court.
According to a post by JDSupra.com,
Despite this clear expression, the DLSE nevertheless maintained this interpretation as the proper view of “regular rate” in its Manual. The trial and appellate court rejected the DLSE language on the basis that it was a void interpretation and the prevailing federal approach (outlined above) applied in California. However, the state Supreme Court in Dart Container concluded that even though the DLSE had not acted lawfully in adopting its interpretation, the DLSE view was nevertheless California law and employers should have reasonably known this was the case.
This means that, for California employers, “regular rate of pay” in certain circumstances will now be calculated differently than for employers anywhere else in the U.S.
Calculating the Court's Impact on California Employers
A post on the MorganLewis.com website noted that,
The court clarified that its holding is limited to flat sum bonuses, and that a different analysis may be warranted for other types of non-hourly compensation whose amounts are roughly increased based on hours worked such as a production or piecework bonus or a commission. Given the court’s holding, California employers who pay nonexempt employees flat sum or other similar bonuses should review how they calculate the regular rate for purposes of paying overtime compensation to ensure compliance with the method required by the California Supreme Court.
California businesses with employees in other states should ensure that their California employees’ overtime is calculated and processed accordingly in compliance with the new ruling. And because the ruling applies retroactively with possible penalties, a comprehensive payroll audit may be advisable.
In addition, businesses may want to look into restructuring certain bonus schemes involving flat-sum bonuses in order to side-step or at least minimize the impact of this decision on future payroll calculations.
Because the state Supreme Court based their decision on the existing polices and intent of the DLSE manual, California employers should consider those policies when developing or revising their payroll and salary practices.
Helping You Stay Compliant
Payroll processing and payroll compliance is often a labor-intensive requirement for employers, and there are scores of resources available for the employer who chooses to manage their own payroll processes.
One option to consider is outsourcing to a managed payroll service. By outsourcing these functions you can also outsource all of the requirements that are currently on your HR staff to maintain compliance.
If your company would like to learn more about its obligations, or acquire resources to deal with payroll requirements, Accuchex recently partnered with HR Solutions Partners to offer its customers the most up-to-date and professional human resources management solutions available.
To learn more about the different levels of Human Resource Management services available, click this link. To learn more about the other payroll services Accuchex provides, click on the button below to get our free consultation.