by Julie Ann Giammona

In Alvarado v. Dart Container Corp. of California, the California Supreme Court determined that an employer should use the number of regular, straight-time hours the employee worked during the pay period (excluding all overtime hours) when calculating an employee’s overtime pay rate where a flat sum bonus has been earned. Moreover, the Supreme Court concluded that such a rule should be applied retroactively to all employers in California such that past practices may result in civil penalties even where the employer held a good faith belief that it was following the current law.

The Facts

Alvarado was employed by Dart Container Corporation (Dart) as a warehouse worker. Dart compensated its employees a flat sum bonus of $15 per day for any employee who completed a full shift on either Saturday or Sunday.  Dart’s formula for calculating an employee’s overtime compensation factoring in the $15 bonus followed a four-step process: (1) Dart multiplied the number of overtime hours the employee worked by the employee’s regular hourly wage rate (straight time); (2)  Dart then added the total hourly pay for non-overtime work, any non-hourly compensation, and the straight-time pay for overtime; (3)  Dart then multiplied the straight-time rate by the total number of overtime hours in the pay period and then divided that amount in half to come up with the overtime premium pay; and  (4)  Lastly, Dart added the base hourly or straight-time rate from Step One with the overtime premium pay from Step 3 to get the total overtime compensation for the pay period.

Alvarado filed a class action lawsuit against Dart, claiming that the above formula was unlawful based upon the Department of Labor Standards Enforcement (DLSE) Manual which specifically requires that in calculating overtime where a flat bonus is earned, the bonus rate is determined by dividing the regular rate of pay for hours worked during the pay period to which the bonus applied, and not by dividing the overtime hours worked.

The Supreme Court Rationale

Most of the legal analysis by the Supreme Court focused on whether the regulation contained in the DLSE Manual was controlling, or whether it was void as an “underground” regulation because it had not been adopted in accordance with the Administrative Procedure Act. After a meticulous and lengthy discussion about how much deference should be given to the DLSE, the Supreme Court decided that the DLSE regulation was void, and thus did not need to be followed by the employer. Notwithstanding this finding, the Court then determined that the DLSE interpretation of California state law was correct, and so ruled in Alvarado’s favor and against Dart.  In reaching this conclusion, the Supreme Court was guided by two unquestionable principles: (1) California’s long-standing favor for limiting working hours to an 8-hour work day and 6-day, 40-hour work week; and (2) the liberal interpretation in favor of protecting employee rights. The Court relied on Labor Code Section 510 in stating that the $15 bonus must be expressed as a per hour value such that an employee’s overtime pay rate is a multiple of his or her “regular rate of pay.”

Two important takeaways from this case:

  1. The Court limited its holding to payments of flat sum bonuses only; arguably, piece-rate or other bonus structures would not be affected by this holding; and
  1. The Court specifically noted that the ruling would apply retroactively to allow the imposition of civil penalties on employers who believed they had been calculating the overtime rate in accordance with California law because in the words of the California Supreme Court, the Court did not want to “[give]employers a free pass as regards their past conduct.”

As is evident from the above case, proper calculation of hourly and overtime rates is complicated and strongly favors the employee. We at Ferber Law strongly urge you to review your overtime pay practices to ensure compliance and avoid costly litigation. Many employers may face liability already from past practices so it is critical that any now unlawful practices be corrected immediately. If you have concerns regarding your pay practices, please contact us to allow us to provide expert guidance, particularly regarding this new formula.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.