This week, in Alvarado v. Dart Container Corporation of California (“Alvarado”), the California Supreme Court rejected decisions reached at both the trial and appellate level on how to properly calculate overtime owed on flat sum bonuses. The Court’s decision will have a significant impact on many California employers.
In order to incentivize employees to work on the weekend, Dart’s employees were paid a $15 attendance bonus for working weekend shifts. To calculate overtime owed on this non-discretionary flat sum bonus, Dart followed the federal method – codified in Fair Labor Standards Act regulations – to determine the employee’s regular rate of pay. Under the federal method, the flat sum bonus is added to other compensation and divided by the total number of hours worked during the workweek to determine regular rate of pay.
Dart’s decision to follow the federal model stemmed from the fact that there is no comparable method under California statute or regulation. Despite the absence of California law on the subject and the codified federal method, the California Department of Labor Standards Enforcement (“DLSE”), in its Enforcement Manual, takes a different position, arguing that regular rate of pay should be calculated by dividing total compensation earned during the workweek by only the regular (non-overtime) hours worked. The DLSE’s perverse justification for this approach is that its method discourages overtime. In other words, the DLSE wants overtime costs to be higher so that employers will be less likely to have employees work overtime. Put simply, the DLSE’s method is intended to take money out of employees’ pockets by having them work less hours. Not surprisingly, the Court of Appeal rejected the DLSE’s position and held that, in the absence of applicable California law, Dart’s calculation - which complied with the FLSA regulation - was proper.
The California Supreme Court, in its opinion in Alvarado, reversed the Court of Appeal’s decision and found that Dart was required to follow the DLSE’s method for calculating regular rate of pay when an employee receives a flat sum bonus. The Supreme Court agreed that California policy was intended to discourage overtime and that California’s various laws regulating overtime are more protective of workers than federal law. Although the Supreme Court agreed with the Court of Appeal that the manner in which the DLSE’s method was adopted did not conform with applicable rulemaking requirements and was not controlling as a matter of law, the Supreme Court nevertheless found the DLSE’s justifications persuasive.
The Supreme Court took the position that, in deciding how to factor a flat sum bonus into an employee’s overtime pay rate, it was obliged to prefer an interpretation discouraging employers from imposing overtime work and favoring the protection of employee’s alleged interests in not working overtime. An additional factor that the Supreme Court felt favored the DLSE’s method was that, under Dart’s policy, the weekend attendance bonus was paid to employees working weekend shifts even if they earned no overtime during the pay period. The Supreme Court found that it therefore makes sense to treat the bonus as if it were fully earned by only the non-overtime hours in the pay period and exclude overtime hours from calculating the bonus’s per-hour value. Of course, one can imagine many circumstances in which the bonus is being paid to employees whose weekend shifts consisted of primarily or exclusively overtime hours. Although it does not address this particular scenario, the Supreme Court did address the argument that overtime work done on a weekday should not increase the size of the weekend attendance bonus because it has no relation to weekday work. The Supreme Court’s response is that the regular rate of pay is a weighted average reflecting work done at varying times and varying rates, and it is therefore not atypical for overtime worked during a low-paying shift to be compensated on an overtime rate reflecting higher pay rates during higher-paying shifts. Following this logic, the Supreme Court finds that it makes sense that the value of the weekend attendance bonus be averaged across the entire pay period. Of course, this rationale does not explain why the overtime hours also should not be counted.
The next bit of rationale gymnastics engaged in by the Supreme Court was to interpret “regular” in “regular rate of pay” as equating to “regular-time”, i.e., non-overtime, as further proof that only non-overtime hours should be used to calculate regular rate of pay. This, of course, ignores that in many employers’ minds “regular” rate is synonymous with an employee’s standard or base hourly rate. While that is not a correct interpretation under California law, it demonstrates the sizable cracks in the Supreme Court’s rationale.
Finally, the Supreme Court rejected Dart’s arguments that ordinary people (including ordinary employers) could never have predicted the law would be interpreted the way the DLSE proposed. The Supreme Court explained that the DLSE and courts are obligated to liberally construe the phrase “regular rate of pay” to protect workers and that it is reasonably to construe it so that the bonus is apportioned only over “regular-time” hours, i.e., non-overtime hours. The Supreme Court adds that the DLSE’s published policy – which the Supreme Court acknowledges is void – nevertheless gives employers every reason to predict the Supreme Court’s interpretation. For that reason, the Supreme Court denied Dart’s request that the holding be applied prospectively only.
COUNSEL TO MANAGEMENT:
The Supreme Court’s decision in Alvarado is deeply disappointing, and its impact will surely be felt going forward as eager plaintiff attorneys seek to pursue unpaid overtime claims – and, more importantly, penalty claims – against employers who utilize attendance bonuses and other flat sum bonuses and who have been following the federal method. While arbitration provisions with class waivers may offer employers some protection, they will not prevent PAGA lawsuits being brought seeking to recover for violations dating back one year. Employers who utilize attendance bonuses may want to think about issuing reconciliation payments to cover any outstanding overtime owed as a result of the Supreme Court’s decision and issuing revised wage statements to cure any inaccurate wage statements which will eliminate the potential for inaccurate wage statement claims pursued under PAGA. If you have questions about the Alvarado case or about how to perform overtime calculations contact the experts at the Saqui Law Group.