United States: Darting Ahead: California Supreme Court Adopts New Formula For Flat Sum Bonuses

Last Updated: March 26 2018
Article by Jesse C. Ferrantella

For decades, many employers across California relied upon established federal law governing the calculation of overtime compensation on bonuses. Under federal law, the same set of rules apply to flat sum bonuses (i.e., set bonus amounts that cannot increase with additional productivity or employee effort) and other bonuses.

That all changed earlier this month when the Supreme Court of California decided Alvarado v. Dart Container Corporation of California. The decision transforms the method for calculating overtime under California law when employees receive flat sum bonuses. The court's decision represents a significant development for employers that pay bonuses and will likely require employers operating in California using flat sum bonuses to revise their pay practices.


Under California law, when an individual receives a nondiscretionary bonus, the bonus payment must be included in the employee's "regular rate of pay" for purposes of calculating overtime. The question in Alvarado was how this calculation should be made with respect to flat sum bonuses. The flat sum bonus at issue was a $15 attendance bonus that employees received when they worked weekend shifts.

The California Division of Labor Standards Enforcement (DLSE) has long taken the position that California requires a special, more expensive overtime calculation for flat sum bonuses. According to the DLSE, to protect against dilution as employees work more overtime, flat sum bonuses are to be divided only by straight-time hours and then multiplied by one-and-one-half (or two in the case of double time) to determine overtime premiums on these bonuses. By contrast, the DLSE opined bonuses that increase with more effort or production (for example, a $5 bonus for every 100 widgets made) could instead by divided by all total hours worked and multiplied by one half (or one in the case of double time) to determine the overtime premium owed.

Federal law, derived from the Fair Labor Standards Act, does not have any unique formula for flat sum bonuses. And until this ruling, the DLSE's position on flat sum bonuses was never actually endorsed by a California court. In fact, the court of appeal in Alvarado rejected the DLSE's position and applied federal law to flat sum bonuses. As a result, many employers relied on federal law to calculate overtime when employees received these bonus payments, using the larger divisor of total hours worked and thus resulting in smaller overtime payments relative to those under the DLSE's formula.

The California Supreme Court's Ruling

The law has changed. The California Supreme Court unanimously reversed the court of appeal's ruling and adopted the DLSE's rule on flat sum bonuses. Although the court did not believe it was bound by the DLSE's guidance, the court nevertheless found the DLSE's reasoning persuasive. The court reasoned that using the DLSE formula to calculate overtime on flat sum bonuses furthered California's public policy of discouraging overtime work. Because flat sum bonuses do not increase with more hours worked, the court concluded that to allow employers to divide by total hours worked in calculating overtime would encourage employers to assign more overtime. In such a case, the more overtime an employer assigned, the larger the divisor would be and the less value the bonus would have relative to each hour worked.  

The rule adopted by the supreme court requires employers, in calculating overtime when employees receive flat sum bonuses, to divide the bonus only by straight-time (i.e., non-overtime) hours to determine overtime compensation on the bonus. The net arithmetic effect is that the formula adopted by the California Supreme Court results in a payment of more than three times as much overtime compensation on the bonus as the federal law formula. 

Implications for Employers

The Alvarado ruling has far-reaching implications for employers that provide bonus or incentive payments in California.

For any employer that pays a flat sum bonus, the decision likely means that the employer will need to revise its pay policies immediately to comply with the California Supreme Court's ruling. At the very least, employers that pay bonuses should consider evaluating their payment policies and calculations to determine if they remain lawful after Alvarado.

In addition to policy revisions, the ruling has significant implications for employer wage-and-hour liability. Importantly, the California Supreme Court rejected the argument that its formula should only have prospective effect. Its formula will therefore apply retroactively to flat sum bonus payments. This means that if an employer previously relied on the federal formula, its past flat sum bonus payments were likely unlawful.

The effect is not simply that employees who received such bonuses were underpaid. On top of the underpayment, employers could be subject to significant penalties. In addition to unpaid wages, employees in wage-and-hour lawsuits typically seek derivative penalties such as wage statement penalties ($50/$100 per pay period), waiting time penalties (up to 30 days of wages), and civil penalties under the Private Attorneys General Act (PAGA) ($100/$200 per pay period per violation). Given these potential penalties, even a small underpayment could give rise to far-reaching exposure that exponentially increases liability.

Moreover, there are many types of flat sum bonuses that are common across industries. They range from attendance bonuses like those at issue in Alvarado to safety bonuses, project-completion bonuses, referral bonuses, job retention bonuses, on-call stipends, and bonuses for earning a degree or technical certification. Therefore, the decision could arguably impact many bonus payments made for a variety of purposes across a broad array of industries.

Finally, the ruling will likely lead to significant administrative challenges for employers—an issue that employers may want to consider. Employers that pay flat sum bonuses like an attendance bonus but also make other incentive payments like commissions will have to work with their payroll providers to ensure that two different formulas are applied to the different payments. Since the flat sum rule is unique to California, it will also result in employers with multistate operations having two different calculations for the exact same type of bonus payment, depending on the state. Employers may want to have these conversations with their payroll providers to ensure technical compliance with the law.

Silver Linings?

For employers, there were not many positives to take away from the Alvarado ruling. But, there were a few potentially helpful comments hidden within the supreme court's ruling.

First, the court confirmed prior law finding that informal positions taken by the DLSE in its enforcement manual are effectively "underground regulations" and not subject to deference. Of course, that does not mean the California Supreme Court will refuse to follow DLSE opinions. After all, it adopted the DLSE's rule in Alvarado. However, this statement is helpful in confirming that the DLSE's published but informal opinions will not be given binding deference by courts.

Second, in a footnote, the court explicitly limited its decision to flat sum bonuses "comparable to the attendance bonus at issue" in the case. The court noted that "other types of nonhourly compensation, such as a production or piecework bonus or a commission, may increase in size in rough proportion to the number of hours worked," and thus might warrant a different analysis. Therefore, the court did not explicitly extend Alvarado to other types of bonuses but instead left ambiguity as the scope of its decision. Employers may be able to rely on this footnote in distinguishing other bonuses from Dart's attendance bonus. For example, the Alvarado court reasoned that a flat sum attendance bonus could encourage an employer to assign more overtime, given that the bonus does not increase as more hours are worked. On the other hand, flat sum referral bonuses may be included in the regular rate of pay, depending on the conditions. However, a referral bonus has no conceivable connection to hours worked and certainly does not encourage an employer to assign overtime. Employers may be able to capitalize on these distinctions and narrow the potential scope of the supreme court's ruling. Only time will tell how this strategy plays out.

Third, in a concurring opinion, Chief Justice Cantil-Sakauye noted that the DLSE could have avoided "uncertainty" over the prior law had an interpretative regulation on this subject been promulgated through formal rulemaking. The DLSE's flat sum bonus interpretation was only present in the agency's enforcement manual, and because it was not subject to any rulemaking procedure, it had no binding effect. The chief justice characterized this uncertainty as regrettable. Although these words do not change the result of Alvarado, they may prove helpful in defending future litigation based on bonus payments. Certain penalties under California law, like waiting time penalties, require a showing of willfulness. Others, such as civil penalties under PAGA, are subject to reduction in the court's discretion. Given the uncertainty over the law and the existence of federal law supporting a completely different flat sum bonus calculation, employers may be able to use the concurrence to argue against imposition of these penalties.

We suspect that Alvarado will give rise to a flood of litigation in the coming months. As this litigation develops, hopefully courts will shed light on these lingering questions. In the meantime, employers should consider carefully evaluating their bonus payments to ensure compliance with the supreme court's decision and working with payroll in updating their flat sum bonus formulas.

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
Masuda, Funai, Eifert & Mitchell, Ltd.
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Masuda, Funai, Eifert & Mitchell, Ltd.
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