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California Supreme Court Ruling Could Lead to Higher Overtime Rates

Employers in the Golden State, take note: a recent ruling by the California Supreme Court clarified how employers in the state must calculate overtime when non-exempt employees earn flat sum bonuses. Employees may even be able to collect up to four years of back wages. This article has more details on this important development.
  • Ruling by the California Supreme Court clarifies how employers in the state must calculate overtime when non-exempt employees earn flat sum bonuses.
  • Decision applies to cases retroactively, as well as going forward.

On March 5, 2018, the California Supreme Court ruled in the closely watched case of Alvarado v. Dart Container Corporation of California, deciding how businesses should figure an employee's regular rate of pay for purposes of calculating overtime when a non-exempt employee earns a flat sum bonus.

The Court's ruling clarifies how California employers that pay flat sum bonuses must calculate overtime compensation. The Court adopted the calculation found in the California Department of Labor Standards Enforcement Policies and Interpretation Manual, by dividing the total compensation earned in the period to which the bonus applies by the non-overtime hours worked by the employee during the same period — and only the non-overtime hours — to calculate the regular rate of pay.

Ruling applies to cases retroactively and going forward

In the original case, the plaintiff, Hector Alvarado, filed a complaint against his former employer, alleging that he was improperly paid overtime during the weeks that he earned a weekend attendance bonus. The state Supreme Court found that when calculating overtime pay in periods in which an employee earns a flat-rate bonus, employers must follow the California Department of Labor Standards Enforcement policy (described above) rather than the federal Fair Labor Standards Act requirements.

Companies with employees working in California will be subject to this ruling retroactively — it will not merely apply to pending and future cases. The facts of this case were based on flat sum bonuses. The ruling does not discuss other types of non-discretionary bonuses.

New calculation could lead to increased overtime pay

Under federal law, an employer must divide an employee's total weekly pay (including non-discretionary bonuses) by the total number of hours the employee worked in the workweek to get the regular rate. The employer then must pay time-and-a-half that rate for all overtime hours.

In the Alvarado decision, applicable where the employee earned a flat sum bonus, the employer must divide the total compensation in the bonus period by "the number of non-overtime hours the employee (actually) worked during the period." This results in a higher regular rate of pay, as well as a higher overtime rate.

Employees can now collect up to four years of back wages

What did the Court mean when it ruled its decision in Alvarado v. Dart Container Corp was retroactive? The Court did not set a specific timeframe, but under the California Code of Civil Procedure, an employee has three years to file a lawsuit to enforce a statutory obligation. The California Supreme Court extended the period in which a person can file a claim against an employer for failure to pay wages, including overtime. Employees can now collect up to four years of back wages, rather than three under the Labor Code. Additionally, an employee can file a claim on behalf of all other similarly situated colleagues in the business without having to file a class-action lawsuit. Under the Labor Code, aggrieved employees could also file a Private Attorneys General Act (PAGA) claim, but that has a one-year statute of limitations. Under a PAGA lawsuit, plaintiffs file lawsuits to recover civil penalties for themselves, other employees, and the State of California for Labor Code violations.

California employers will need to review their current and prior overtime pay practices to assess their risk of liability and appropriately account for flat sum bonuses.

Tammy Tyler

Tammy Tyler is an employment law compliance manager at Paychex, Inc., a leading provider of integrated solutions for payroll, HR, retirement, and insurance services.

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