The California Supreme Court Agrees With the DLSE Interpretation of How to Calculate Overtime On Flat Sum Non-Discretionary Bonuses
Posted March 8, 2018

On March 5, 2018, the California Supreme Court gave employers clear guidance on how to correctly calculate overtime pay on flat sum non-discretionary bonuses. Specifically, the Court said that employers should have always used the formulas outlined in the 2002 DLSE Enforcement Policies and Interpretations Manual (DLSE Manual). Here is how it works:

If the bonus is a flat sum, such as an annual longevity bonus or seasonal completion bonus, the commission is calculated differently. Assume the employee receives $500 for completing another year with the company. If the employee worked 2000 regular hours during the year (do not include overtime hours), then divide $500 by 2000, which equals $.25. The employee would then be entitled to 37.5 cents for each overtime hour (and $.50 for each double time hour). If the employee had 100 hours of overtime that year, then the employee would be entitled to another $37.50 beyond the $500 bonus.

(See, The 2002 Update of the DLSE Enforcement Policies and Interpretations Manual (Revised) at section 49.2.4. 2. p. 49-9.)

LightGabler has counseled its clients for years to use the DLSE calculation, and not the federal law calculation. Now the California Supreme Court in Alvarado v. Dart Container Corporation of California (“Dart Container”) has confirmed it was the right advice all along (as the Court noted, the DLSE interpretation was determined to be void 20 years ago for failing to comply with the APA, void does not necessarily mean wrong).

The scariest part of Dart Container is that the Court also clarified that the application of law (using the DLSE formula) is retroactive in nature, exposing employers who incorrectly calculated bonuses to up to four years of potential liability. The time to take action is now. Employers who have paid any type of non-discretionary bonuses to non-exempt employees should immediately seek legal advice to determine whether they are paying overtime correctly and consistent with the law clarified in Dart Container. LightGabler has experienced wage and hour attorneys that are fully versed in this and other wage and hour challenges. We are available to provide immediate assistance.

As for the specific facts of Dart Container, the employee received an “attendance bonus” in addition to his hourly wage if he worked on the weekend and completed the shift. The amount of the bonus was a flat sum of $15, regardless of whether the employee worked in excess of the normal work shift on the day in question.

The dispute arose because the attendance bonus must be factored into an employee’s overtime pay rate so that the overtime pay rate reflected all regular compensation that the employee earned. The defendant wanted to use federal law, by adding the bonus, total hourly pay for nonovertime work during the pay period, and base hourly pay for overtime (excluding the premium). This sum would be divided by the total hours worked, including overtime hours, to determine the regular rate of pay. This calculation favored the employer, and is incorrect according to the holding of Dart Container. The correct view of state law, according to the Supreme Court, and the proper divisor for calculating the per-hour value of a flat sum bonus is the number of nonovertime hours the employee worked during the pay period.

As noted above, the DLSE’s formula (the one adopted by the Dart Container court), is a three-step process.

  • First, determine the overtime due on the regular hourly rate.
  • Second, separately compute the overtime due on the flat sum bonus by dividing the regular bonus rate by the nonovertime hours worked and multiply the employee’s straight time rate by 1.5, not .5 to determine the overtime rate.
  • Third, multiply the overtime hours, and add this amount to the overtime due on the regular hourly rate to determine total overtime compensation for the pay period. This is marginally more favorable to the employee.

The trial and appellate court incorrectly relied on federal law to make the overtime calculations. The court justified the reliance on federal law because each court believed there was no valid California law or regulation explaining how to factor a flat sum bonus into an employee’s regular rate of pay for purposes of calculating overtime compensation. The California Supreme Court disagreed with this analysis.

The Supreme Court reasoned that despite being void, the DLSE Manual’s calculation was interpretive of some governing statute or regulation. Thus, the California Supreme Court noted that it should not necessarily reject the agency’s interpretation of controlling law. Even if the policy statement is void, the law the agency attempted to clarify continued to govern, and it continued to call for interpretation.

To bolster this reasoning, the California Supreme Court independently reviewed the governing law, and ultimately agreed with the DLSE’s interpretation of how to factor a flat sum bonus into an employee’s regular rate of pay for purposes of calculating overtime compensation.

For assistance with any employment law matters contact the employment attorneys at LightGabler.