California Supreme Court Instructs on How California Employers Must Calculate Overtime on a Flat, Non-Production Bonus
Topics: Wage & Hour Issues
Sometimes I wonder if California lawmakers (the legislature and courts) are trying to encourage employers to flee the state. I had that thought again today while reading the California Supreme Court’s opinion in Alvarado v. Dart Container Corp. This case involves the issue of how to calculate the overtime rate of pay under California law when a non-exempt, hourly employee is paid a flat “bonus” (e.g. $15 extra) for working on a weekend day. In other words, the bonus was a type of shift differential or attendance bonus tied to working undesirable shifts. Because no good deed ever goes unpunished, the employer got sued for providing extra compensation to the employees who worked on the weekend. According to the plaintiffs, the employer did not properly calculate the overtime rate of pay during weeks in which the bonus was paid. To be clear, this isn’t an employer who ignorantly did not know that bonuses (where non-discretionary) must be included in calculating the overtime rate. On the contrary, the employer did include the bonuses in calculating the overtime rate. According to plaintiffs, however, the employer just did not do it right. The employer followed the well-publicized Fair Labor Standards Act (“FLSA”) method for calculating the overtime rate where extra forms of compensation (on top of the base hourly rate) are paid to an employee during a workweek. Under that easy-to-follow method, the employer paid the employees their base hourly rate for all hours worked, added the bonus, and then paid overtime compensation for all overtime hours at the rate of .5 times [the employee’s total compensation divided by total hours worked]. Seems reasonable, right? The California Court of Appeal thought so, finding in favor of the employer and holding that the employer properly compensated its employees under California law.
Enter California Supreme Court. Today, the state high court disagreed and held that the employer failed to properly compensate its employees for overtime compensation during pay periods where the weekend attendance bonus was earned. The Court held that California law is different than the FLSA and more protective of employees than the FLSA (i.e. if we can interpret California law in a way that will result in a more favorable outcome for the employee than would result under the FLSA, then we’ll go with the more favorable interpretation). From that reasoning, the Court held that where the extra compensation is a flat bonus that is not tied to production, such as the weekend work bonus at issue in this case, the overtime rate of pay must be calculated by dividing the bonus only by the employee’s non-overtime hours worked during the pay period (rather than by the employee’s total hours worked, including overtime hours). The Court reasoned that this type of bonus is not tied to production or hours worked, but would be paid in the same amount regardless of how many hours the employee worked during the workweek. Because of this, the Court stated that it would be unfair to include overtime hours when calculating the overtime rate of pay on the bonus. [If overtime hours were included when dividing the bonus by hours worked, the overtime would be paid at a lower rate than if the overtime hours were not included.] As such, the Court held that when calculating the overtime rate of pay on this type of bonus, the amount of the bonus compensation must be divided by the total number of non-overtime hours to derive an hourly rate, 1.5 times which would be paid for all overtime hours worked.
To make matters worse for California employers, the Court suggested in a footnote that a different method (e.g. the FLSA method) “may” apply where other types of bonuses/extra compensation is involved that is more closely tied to production and earned in part by working overtime hours, i.e. production bonuses, commission, hours-based bonuses, piece rate compensation. In these circumstances, it “may” be appropriate to divide that type of extra pay by total hours worked (rather than just non-overtime hours) to calculate the overtime rate on the bonus. The Court did not provide clear lines in this regard, however. Incidentally, lack of clarity in the law is what led to Dart Container being sued in the first place. No California statute, regulation, Wage Order, or caselaw clearly instructed that overtime compensation needed to be calculated in this manner. Dart Container argued this to the Supreme Court, suggesting that its due process rights would be violated if it were held retroactively liable for improperly calculating the overtime rate in these circumstances. Dart Container asked that the Court make its decision operate prospectively only, but the Court rejected this request. As such, it remains the legal landscape in California that employers must operate with a crystal ball (at risk of huge monetary penalties for getting it wrong) in guessing how the DLSE and the courts will interpret provisions of the Labor Code and Wage Orders when those provisions were not clearly drafted in the first place.
Take-away? The sad reality of this development is that from a litigation risk perspective, California employers would be best off not paying bonuses or other forms of non-discretionary “extra” pay to non-exempt hourly employees. If you pay extra compensation, and your employees work overtime, you will be at risk of being sued (typically in a class action) for not calculating the overtime rate of pay properly. If you choose to continue paying bonuses and similar extra compensation to non-exempt employees, it would be advisable to have each type of bonus reviewed to determine the proper means of calculating overtime on that bonus. The issuance of today’s California Supreme Court opinion is almost a guarantee that litigation in this area will spike in the coming year.