United States: California Changes The Rules For Calculating Overtime On Employee Bonuses

Last Updated: March 8 2018
Article by Krista M. Cabrera, Kamran Mirrafati and Christopher G. Ward

The California Supreme Court just threw employers a serious curveball with respect to how employers must calculate overtime. And it did so by claiming employers should have known of this calculation method even though the same California Supreme Court declared it void over 20 years ago.

The March 5, 2018 decision of Alvarado v. Dart Container Corp of Cal., fundamentally changes how employers in California must calculate the "regular rate of pay" for overtime purposes when non-exempt employees receive a flat sum bonus that is not explicitly linked to performance/production incentives (i.e., attendance and/or longevity bonuses).

California now expressly departs from federal law on this issue, and has instead dragged up a voided interpretation of how to calculate regular rate, reasoning that "void ... does not necessarily mean wrong."

Federal law requires employers to pay overtime based on an employee's "regular rate of pay," which often – but not always – is the same as the employee's normal hourly rate of pay. However, when an employee works at two different hourly rates during the same workweek (such as with the case of shift differentials) or receives certain types of compensation in addition to an hourly rate of pay (such as a bonus), the employee's hourly rate and "regular rate" typically will not be the same.

When an employer provides includable bonus compensation1 to an employee, the federal standard calculates regular rate by dividing the total compensation earned by the total hours worked during the relevant time period. This is best understood with a mathematical example:

Consider an employee who earns $15/hour, works 47 hours in a workweek, and also receives a $50 attendance bonus for that week.

Her regular rate is derived as follows: (($15 x 47) + $50 = $755)/47 = $16.06.

To then determine the employee's total compensation, you then take the $755 earned at the effective hourly rate and add half the "regular rate" for each overtime hour worked (because you've already paid the "one" of the "one and a half times" in the first step) as follows: $755 + ($8.03 x 7) = $811.21.

The California Division of Labor Standards Enforcement (DLSE) opined decades ago that "regular rate of pay" in California for these circumstances must be based only an employee's "non-overtime" hours, rather than all hours worked in the week, but in 1996, the California Supreme Court found that the DLSE Enforcement Policies and Interpretations Manual provision on this point was a void regulation not entitled to any deference because it was not adopted in compliance with proper legal procedure.

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.

What this means is that "regular rate of pay" – at least in some circumstances – must now be calculated differently in California than anywhere else in the country and that this ruling is retroactive. In California, "regular rate" for certain, flat-sum, non-performance related includable bonuses, now uses only an employee's non-overtime hours in the denominator and overtime must be paid on the bonus separately from the normal hourly compensation. Using our same example above (and assuming the employee did not work any daily overtime, but only weekly overtime hours), the employee's total compensation calculated under the "new but retroactive" standard is as follows:

Non-bonus compensation: ($15 x 40 regular hours) + ($22.50 x 7 OT hours) = $757.50

Overtime due on bonus: $50/40 regular hours = $1.14; $1.14 x 1.5 =$1.71; $1.71 x 7 OT hours = $11.97

Total compensation: $757.50 + $11.97 + $50 bonus = $819.47.

Stepping away from the math, what Dart Container means in practical terms is that employers that have paid certain flat-sum bonuses to non-exempt California employees and made adjustments to the regular rate and overtime based on the always-accepted approach (instead of the previously "void" approach) have just been deemed to have paid overtime using an improper method that is less favorable to workers.

Given the wage and hour and class action climate prevailing in California, this sudden change should have employers' attention, and those that have paid any type of bonus to non-exempt employees in California should seek immediate counsel. Foley & Lardner LLP partners and wage and hour practitioners Christopher Ward, Krista Cabrera and Kamran Mirrafati are fully versed on this new concern and all of California's other wage and hour challenges, and are available to provide immediate and practical assistance.


1 Not all bonuses become part of an employee's "regular rate of pay"; rather, it depends on whether a bonus legally qualifies as discretionary. However, what many understand "discretionary" to mean and what it legally means in the context of calculating "regular rate" are significantly different concepts requiring examination beyond the scope of this article. Employers paying any type of bonus to non-exempt employees would be wise to consult with counsel – regardless of location – to assess whether they are paying overtime consistent with the legally required "regular rate of pay."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions