hourglass-small.jpgA recent California Court of Appeal decision sheds light on what formula an employer may use to calculate overtime pay for an employee who receives a flat sum attendance bonus in the same pay period it was earned.  In Alvarado v. Dart Container Corp., the Court of Appeal held that an employer may follow the federal law formula, and need not apply an alternative formula endorsed by the California Division of Labor Standards Enforcement (“DLSE”) that is more generous to employees.

The case is summarized in more detail below:

Hector Alvarado worked for Dart Container Corp. (“Dart”) as an hourly employee.  Dart paid Alvarado a flat sum attendance bonus of $15 for any Saturday or Sunday on which he completed a full shift.

During at least some weeks in which he earned an attendance bonus, Alvarado also worked overtime.  For these weeks, Dart was required to incorporate Alvarado’s attendance bonuses into his regular rate of pay, which in turn would determine Alvarado’s overtime compensation.  To satisfy this requirement, Dart calculated the regular rate for Alvarado using the following formula derived from federal law:

  1. Multiply the employee’s straight hourly rate by any overtime hours worked.
  2. Add the amount from Step 1 to the amounts owed for regular non-overtime work and extra pay such as attendance bonuses.
  3. Divide the sum from Step 2 by the total number of hours worked to arrive at the regular rate.

After determining Alvarado’s regular rate, Dart divided it in half and multiplied this amount by Alvarado’s overtime hours to obtain his “overtime premium.”  The overtime premium was then added to the amount calculated in Step 1 above to obtain Alvarado’s total overtime pay.

Dart’s formula for calculating the regular rate, while consistent with federal law, conflicted with the formula provided in DLSE Manual sections and  By way of background, the DLSE Manual contains DLSE’s interpretive positions on various California labor laws.  Under the DLSE formula, in calculating the regular rate for an employee who receives a flat sum bonus, the bonus amount must be divided by the employee’s regular hours during the period to which the bonus applies rather than the employee’s total hours.  Accordingly, under the DLSE formula, Alvarado’s regular rate and his overtime compensation would have been higher than under the federal law formula that Dart applied.

Alvarado sued Dart alleging, among other things, that Dart violated California law by not using the DLSE formula to calculate his regular rate.  The trial court rejected Alvarado’s claim and the Court of Appeal affirmed, holding that Dart was not required to follow the DLSE formula.  “[T]he DLSE Manual does not carry the force of law,” the Court explained.  The Court noted that state law could regulate overtime pay on bonuses in a more restrictive manner than federal law.  Here, however, there was no California law or regulation which specified a method for computing overtime on flat sum bonuses.  Accordingly, the Court held, Dart was only required to follow the federal law formula in computing Alvarado’s regular rate, which it did.

The Alvarado case is a reminder that in calculating amounts due for overtime, employers should ensure they are properly accounting for attendance bonuses and similar forms of additional compensation.  Regular rate calculations can raise complex legal issues and are a frequent source of litigation.

Note:  With limited exceptions, public agencies are subject only to federal wage and hour laws.