United States: New California Decision Favors Employees Who Receive Bonus Pay

On March 5, 2018, the California Supreme Court issued a decision concerning the way that certain bonus pay affects the calculation of an employee's regular rate under California Labor Code § 510 for purposes of determining overtime. Because this involves employee wages, claims that can reach back as far as four years, the impact on employers could be significant.

The essential facts of Alvarado v. Dart Container Corporation (2018) 2018 WL 11446645 are fairly straightforward. Employees who were scheduled to work on a Saturday or a Sunday, and who worked that scheduled shift, received a flat-sum bonus of $15.00 per day of weekend work. This bonus was paid irrespective of the number of hours worked during the particular pay period. For purposes of determining an employee's Labor Code § 510 regular rate of pay when calculating overtime, the employer spread this bonus across all hours worked during the pay period, both straight time and overtime hours. Consequently, the more hours an employee worked during the pay period, the smaller the increase in the employer's calculation of the "regular rate" when adding the flat-sum bonus. The employee sued, arguing that the flat-sum bonus should have been spread across non-overtime hours, only. The trial court and the appellate court agreed with the employer. The California Supreme Court, however, reversed, concluding that because overtime wage rules were intended to discourage overtime, the calculation more favorable to the employee – and so presumably more discouraging to requiring an employee to work overtime – was the appropriate method to apply.

In order to reach this conclusion, the court relied on an express provision of the Enforcement Policies and Interpretation Manual published by the California Division of Labor Standards and Enforcement ("DLSE"). This might not seem like a remarkable result, except that in order to do this, the court had to analyze its way around a string of cases standing for the proposition that the DLSE's Enforcement Manual consisted of policies that were void – i.e., not controlling – because they had not been promulgated in accordance with the Administrative Procedures Act. The analytical gymnastics were made necessary in part by the fact that a federal wage rule supported the employer's position.

In the end, the court could not avoid the weight of prior authority holding that the DLSE Enforcement Manual provision was a void regulation. Despite that, the court decided that it still could rely on the DLSE Enforcement Manual provision so long as the court, in the exercise of its independent judgment, concluded that the provision correctly interpreted the relevant statutes.

The extended Administrative Procedures Act discussion notwithstanding, the rationale for the court's decision actually was rather simple: "[I]n deciding how to factor a flat sum bonus into an employee's overtime pay rate, we are obligated to prefer an interpretation that discourages employers from imposing overtime work and that favors the protection of employee's interests." Alvarado, 2018 WL 1146645, *9. In other words, choose the analysis that favors the employee.

The court did appear to distinguish between bonuses that are used simply to ensure that an employee remains employed, i.e., shows up for work as scheduled, and those which are "a reward 'for each hour of work'". In the latter case, it might be permissible to spread the bonus across all hours worked, including overtime hours, as the bonus arguably is given to encourage the increased number of hours worked.

It is important to note that the decision in Alvarado not only prohibits spreading a flat-sum bonus across overtime hours, it also prohibits spreading the bonus across an assumed regular 40-hour week. The flat-sum bonus is spread across non-overtime hours actually worked, only. The court noted – but was not troubled by – the reality that this rule has the effect of increasing the regular hourly rate the lower the number of regular hours actually worked, finding "that [the] disparity simply is in the nature of what a flat sum bonus is." Alvarado, 2018 WL 1146645 at *13.

For employers that pay a flat-sum (or any) bonus that is not based on the number of hours worked, but instead is based simply on the fact of showing up for work, the Alvarado decision requires that those bonuses be applied only to the non-overtime hours actually worked when calculating the regular rate needed to determine overtime under California Labor Code § 510. It is that rate which, in turn, is used to calculate the appropriate overtime rate (time-and-a-half or double-time).

Employers should review all bonus programs and consult with their advisors to assess whether Alvarado requires a change in how the Labor Code § 510 regular rate is calculated depending on the particular bonus. Given the serious wage & hour enforcement tools available to California employees, both the bonus program review and any appropriate changes should be seen to promptly.

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.

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