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California Supreme Court Clarifies Overtime Calculations Involving Flat-Sum Bonuses

04/02/18

Author: ADP Admin/Wednesday, March 28, 2018/Categories: Compliance Corner

The California Supreme Court recently issued a decision, Alvarado v. Dart Container Corp. of California, significantly impacting how employers must calculate overtime pay when non-exempt employees receive a flat-sum bonus.

The Court ruled that when calculating overtime during pay periods when an employee received a flat-sum bonus, employers must divide the bonus by the number of non-overtime hours actually worked.

In California, a flat-sum bonus is generally considered to be a bonus that does not increase or decrease based on the amount of time worked or production of the employee. As explained below, this decision effectively rejects the federal formula for calculating overtime when an employee receives a flat-sum bonus.

Please note that the court’s opinion states that this ruling is effective retroactively.

California Overtime Calculation:
In California, employers must pay non-exempt employees 1.5 times their “regular rate of pay” for:

  • Hours worked in excess of eight in a workday;
  • More than 40 hours in a workweek; and
  • For the first eight hours of work performed on the seventh consecutive work day in a single workweek.

California also requires employers to pay non-exempt employees double their “regular rate of pay” for all hours worked in excess of:
  • 12 hours in any workday; and
  • Eight hours on the seventh consecutive work day in a workweek.

For the purposes of determining an employee’s regular rate of pay, employers must not only include hourly wages, but also nondiscretionary bonuses and certain other types of compensation. “Regular rate of pay” can change each pay period. Most bonuses are considered to be nondiscretionary, including those based upon hours worked, production, or proficiency. Discretionary bonuses (those completely in the control of the employer) are not calculated into the employee’s regular rate of pay.

Call to Action:
  • Review the different types of bonuses that you provide to your non-exempt employees and determine whether they would be considered to be “flat-sum” bonuses.
  • Consult with your legal counsel to determine whether any action would be advisable based on the retroactive effect of the California Supreme Court’s ruling.
  • Watch for future communications from ADP regarding updates to assist you with this calculation.

If you would like to review the details included in Alvarado v. Dart Container Corp. of California, please visit http://www.courts.ca.gov/opinions/documents/S232607.PDF.