Federal Law Applies in Calculating Overtime on Flat Sum Bonuses

Paying employees a bonus may trigger the obligation to pay retroactive overtime. The good news is that Alvarado v. Dart Container Corporation of California clarifies that it is lawful for California employers to use the formula found in Title 29 of the Code of Federal Regulations section 778.209(a) when calculating overtime on flat sum bonuses, rather than the California Division of Labor Standards Enforcement Manual. Click here to read.

Production and Flat Rate Bonuses

Alvarado involves a non-discretionary bonus, which is an extra wage paid for extra service performed by an employee and usually based on a promise to pay if the employee performs the service. The non-discretionary bonus must be paid in the payroll period when the service is performed. Generally, the payment of a non-discretionary bonus to non-exempt employees triggers an additional overtime obligation because it retroactively increases the regular rate of pay for the employee receiving the bonus for the time period covered by the bonus. The regular rate of pay for overtime purposes includes all compensation earned during the workweek. Employers should calculate a “regular rate” of pay on the bonus itself and then pay some portion of that regular bonus rate for each overtime hour worked during the period in which the bonus was earned. The method for calculating the overtime due on the bonus depends upon whether the amount of an employee’s bonus increases with each hour worked (a production bonus) or whether the amount of the bonus is fixed independent of the hours worked (flat rate bonus).

The court’s last guidance involving the proper method of calculating overtime on bonuses was Marin v. Costco Wholesale Corp. (2008) 169 Cal.App.4th 804 (Marin), which involved a hybrid of the two types of bonuses (production and flat rate). Marin concerns a deferred, semi-annual, formulaic bonus that was not paid in the same pay period earned. The Marin bonus was based on the number of years worked for the company and number of paid hours accrued during a six-month period. In addition, the bonus was paid at the end of a six-month period, with overtime pay added to the bonus. Furthermore, in Marin, unlike in the Alvarado case, there was no directly applicable federal regulation or statute.

Facts Regarding Bonuses in Alvarado

Alvarado concerns a flat sum bonus paid in the same period earned and whether the employer had to follow state (plaintiff’s position) or federal law (the employer’s position) when calculating overtime on the bonus. In Alvarado, the employer had a policy where it paid its employees an attendance bonus of $15 per day for working a full shift on Saturday or Sunday, regardless of the number of hours worked beyond the normal scheduled length of a shift. The employer used the following formula to determine the amount of overtime paid on attendance bonuses during a particular pay period, as quoted from the court opinion:

1. Multiply the number of overtime hours worked in a pay period by the straight hourly rate (straight hourly pay for overtime hours).
2. Add the total amount owed in a pay period for (a) regular non-overtime work, (b) for extra pay such as attendance bonuses, and (c) overtime due from the first step. That total amount is divided by the total hours worked during the pay period. This amount is the employee’s “regular rate.”
3. Multiply the number of overtime hours worked in a pay period by the employee’s regular rate, which is determined in step 2. This amount is then divided in half to obtain the “overtime premium” amount, which is multiplied by the total number of overtime hours worked in the pay period (overtime premium pay).
4. Add the amount from step 1 to the amount in step 3 (total overtime pay). This overtime pay is added to the employee’s regular hourly pay and the attendance bonus.

Plaintiff earned attendance bonuses during weeks he worked overtime and sometimes double time. Plaintiff argued that the employer’s formula diluted and reduced the regular rate of pay by including overtime hours when calculating the regular rate of pay used to compute overtime on plaintiff’s flat sum bonuses.

DLSE Manual and DLSE Opinion Letters

In addressing the issue of whether defendant’s formula for calculating overtime on plaintiff’s flat sum bonuses was lawful, the court looked to both federal and state wage and hour law. One of the plaintiff’s arguments was that the formula found in California’s Division of Labor Standards Enforcement (DLSE) Manual sections 49.2.4.2 and 49.2.4.3 applied. However, the court stated that the DLSE Manual’s written policies and opinion letters interpreting the Industrial Welfare Commission (IWC) wage orders constituted void regulations because they were legislative in nature and were not adopted in accordance with the requisite rulemaking process.

Though not binding, employers should note that the DLSE Manual and opinion letters may be persuasive as precedents in similar cases and may help mitigate potential liability. A court’s reliance on the DLSE Manual will depend on the thoroughness evident in its consideration, the validity of its reasoning, its consistency with earlier and later pronouncements, and all those factors which give it power to persuade, if lacking power to control.

The DLSE Manual provisions addressed overtime on flat sum bonuses at sections 49.2.4.2 and 49.2.4.3 but the only source cited for use of the formula was “public policy”, which the court opined, carried no force of law.

However, federal wage and hour law under the Fair Labor Standards Act (FLSA) provided formulas for a production bonus and a formula for overtime in general:

“Where a bonus payment is considered a part of the regular rate at which an employee is employed, it must be included in computing his regular hourly rate of pay and overtime compensation. No difficulty arises in computing overtime compensation if the bonus covers only one weekly pay period. The amount of the bonus is merely added to the other earnings of the employee (except statutory exclusions) and the total divided by total hours worked.”

The court found that because there was no binding California law or regulation providing a formula for computing overtime on flat sum bonuses, the federal regulation applied, and the employer lawfully used the federal formula for computing overtime on plaintiff’s flat sum bonuses.

The appellate court therefore affirmed summary judgment in favor of the employer against plaintiff’s causes of action for: (1) Failure to pay proper overtime in violation of Labor Code sections 510 and 1194 by not including shift differential premiums and bonuses in calculating overtime wages; (2) Failure to provide complete and accurate wage statements, in violation of Labor Code section 226; (3) Failure to timely pay all earned wages due at separation of employment, in violation of Labor Code sections 201, 202, and 203; (4) Unfair Business Practices, in violation of Business and Professions Code section 17200 et seq.; and (5) civil penalties under the Private Attorneys’ General Act of 2004, Labor Code section 2698 et seq. (PAGA).

Conclusion

As noted in Alvarado, calculating bonus overtime under California and federal law can be complicated and can lead to wage and hour lawsuits. Employers who pay bonuses should consult with legal counsel to determine whether their method of payment complies with applicable federal and state law.