On March 5, 2018, the Supreme Court of California issued a ruling in the case Alvarado v. Dart Container Corporation in favor of employees who receive overtime pay as well as a flat sum bonus. In that case, the plaintiff, Hector Alvarado, worked for defendant, Dart Container Corporation of California, as a warehouse associate. Dart had a policy providing for a $15 attendance bonus for any employee who was scheduled to work a weekend shift and completed the full shift. The flat sum bonus was paid regardless of the hours an employee worked beyond the normal shift. Alvarado sued, and alleged that defendant had not properly computed his overtime pay. The California Supreme Court agreed with Alvarado. The Court clarified the correct method of calculating the “regular rate of pay” from flat sum bonuses in California. Although the decided issue only applied to the calculation of overtime from flat sum bonuses, the Court’s reasoning has ramifications for overtime pay calculated arising from other types of compensations in California.
In order to compute overtime pay, statutory laws provide for a rate of at least 1.5 times the “regular rate of pay.” To find the “regular rate of pay” for the attendance bonus, one divides the total compensation by the number of hours worked. If the number of hours worked includes overtime hours, the answer to the equation or “regular rate of pay” would decrease, hurting the employee. And if the number of hours worked excludes overtime hours, the resulting answer or “regular rate of pay” increases, which would increase the employee’s overtime pay. The Supreme Court gave three possible options to calculate an employee’s overtime pay rate when the employee earned a flat sum bonus during a single pay period. The Court considered whether the divisor for purposes of calculating the per-hour value of the bonus should be
- the number of hours the employee actually worked during the pay period, including overtime hours;
- the number of nonovertime hours the employee worked during the pay period; or
- the number of nonovertime hours that existed in the pay period, regardless of the number of hours the employee actually worked. Alvardo argued for the second option, while the defendant argued for the first option.
In determining the appropriate method, it was necessary for the Court to resolve whether the flat sum bonus should be treated as if it were earned throughout the entire pay period (including any overtime hours), or whether the bonus should be treated as if it were earned throughout only the nonovertime hours of the pay period.
The Court first addressed whether the Division of Labor Standards Enforcement (“DLSE”) Manual, which favored the second option, was controlling, or whether it was a void “underground” regulation. The Court determined that the DLSE Manual policy was void because it was not subject to formal rule-making procedures required by California administrative law. Despite finding that the DLSE Manual was void, the Court noted that its interpretation of state law was correct. The Court determined that it may consider the agency’s interpretation if the Court’s own independent judgment reached the same conclusion.
The Court then analyzed Labor Code section 510 and the IWC wage order, which state that an employee’s overtime pay rate is a multiple of his or her “regular rate of pay.” According to this definition of overtime pay rate, a flat sum bonus must be expressed as a per-hour value if it is to affect the overtime pay rate, even though it is not calculated per hour. The Court reasoned that because the weekend attendance bonus was payable even if the employee worked no overtime at all during the relevant pay period, the bonus should be properly treated as if it were fully earned by only the nonovertime hours in the pay period. The Court concluded that only nonovertime hours should be considered when calculating the bonus’s per-hour value.
The Court also analyzed the plain meaning of the phrase “regular rate of pay” to further support its conclusion. Because an employee’s regular rate of pay changed from pay period to pay period depending on whether the employees had earned shift differential premiums or nonhourly compensation, and because Labor Code section 510 and the IWC wage orders defined the overtime rate of pay as a multiple of the regular rate of pay, the Court reasoned that the word “regular” in “regular rate of pay” did not mean “constant,” but rather “regular-time” or “nonovertime” rate of pay. That interpretation implied that when nonhourly compensation, like the flat sum bonus, was factored into an employee’s “regular rate of pay,” only nonovertime hours should be considered.
The Court looked at the DLSE manual to ascertain why the manual argued for the second option regarding the use of the divisor in this situation as well. The DLSE explained why overtime hours should not be included in the divisor, saying: “If the bonus is a flat sum, such as . . . $5.00 for each day worked,” only nonovertime hours should be considered “because the bonus is not designed to be an incentive for increased production for each hour of work; but, instead is designed to insure that the employee remain in the employ of the employer.” (DLSE Manual, supra, § 126.96.36.199, p. 49-9, italics added.) The Court believed that the DLSE identified an important distinction that is relevant to this case. If a bonus was a reward “for each hour of work,” and its amount increased in rough proportion to the number of hours worked (as might be true of a production or piecework bonus or a commission), then the payment of the bonus itself would constitute base compensation, both regular work and overtime work. But the attendance bonus at issue in this case did not reward the employee “for each hour of work,” and its amount did not increase in rough proportion to the number of hours worked. The attendance bonus was rather a flat sum bonus that rewards the employee for completing a full weekend shift.
The distinction the Supreme Court made between hourly and nonhourly compensation is instructional as a bellwether for future rulings on how overtime is to be calculated for other types of compensation, such as production/piecework bonus or a commission. Although the Court mentioned how a commission or production/piecework bonus might increase in rough proportion to the number of hours worked, it was only a hypothetical. One could imagine a scenario where an employee who earns production/piecework bonus or a commission works more hours and gets paid less because he or she is being challenged by the complexity or difficulty of the project, but could only charge a relatively low price. One could also imagine a scenario where the same employee works less hours and gets paid more of the production/piecework bonus or commission because he or she easily figures out how to tackle the challenges of the project and is able to charge a relatively high price. From that point of view, it is possible for a worker to work 40 hours every week, but have his or her paycheck fluctuate immensely. Arguably, the production/piecework bonus or commission in this case is a nonhourly compensation.
The compensation is subject to the unique skill set of the employee or the vicissitudes of the market but not the number of hours a worker puts into a project. If that is the case, one could argue, through Alvarado v. Dart Container, that production/piecework bonuses and commissions in some cases are not rewards for each hour of work, and that their amounts do not increase in rough proportion to the number of hours worked. Under this premise, Alvarado v. Dart Container would support the use of nonovertime work hours as the divisor to calculate the worker’s regular rate of pay since the production/piecework bonuses or commissions in question do not reward the employee “for each hour of work.”