California Supreme Court clarifies OT bonuses

In a decision that largely favors employees, the California Supreme Court has issued a decision in an overtime calculation case.

The high court unanimously ruled that when calculating overtime for pay periods in which an employee earns a flat rate bonus, employers must divide the total compensation earned in the pay period by only the non-overtime hours worked. This is contrary to the federal overtime method used under the Fair Labor Standards Act. California employers must follow the state rule.

In addition, the court said the ruling is retroactive, so employers may need to go back and pay workers if they haven’t used the approved calculation method until now.

Recent case: Hector worked for Dart Container as a warehouse associate for about 16 months. Workers earned an attendance bonus if they worked a full weekend shift. The bonus was $15 per day regardless of whether those shifts amounted to overtime hours.

Hector sued, alleging violations of California wage-and-hour law. His lawyers argued overtime should be calculated like this:

  • Calculate the overtime compensation attributable only to an employee’s hourly wages by multiplying the employee’s hourly rate by 1.5 and by the number of overtime hours worked.
  • Calculate the overtime premium attributable only to the employee’s bonus by dividing the bonus amount by the total non-overtime hours worked and multiplying that value by 1.5.
  • Multiply the bonus overtime premium by total overtime hours worked, and pay that amount in addition to the amount in step 1 as total overtime compensation.

The court concluded Hector was right. (Alvarado v. Dart Container Corporation of California, California Supreme Court, 2018)

Advice: Review your overtime practices (and work with your payroll processor) to assure you are in compliance with this latest ruling.