California businesses must follow a different standard than that allowed under the federal rules when calculating overtime to address flat sum bonuses. The ruling in Alvarado v. Dart Container Corporation of California* is retroactive, and businesses should assess whether their current practice is in line with the standard articulated in Alvarado.
Hector Alvarado worked for Dart as a warehouse associate in California. He filed a lawsuit on behalf of himself and other nonexempt hourly warehouse workers. Dart paid a “flat sum” attendance bonus of $15 to $30 to employees to encourage weekend shifts and regular attendance. It is undisputed that Dart included the attendance bonus when calculating employee rates-of-pay for purposes of determining overtime. However, Dart followed the federal rules in its calculation. Under the federal rule, the total pay given was divided by the total hours worked to determine the regular rate-of-pay, which was then multiplied by 0.5. Dart argued that, because no California law was on point, it was lawful for it to follow the on-point federal rule.
Alvarado, however, claimed that Dart should have followed the formula outlined by California Division of Labor Standards and Enforcement Manual. Per the DLSE Manual, the total pay given is divided by the non-overtime hours and then multiplied by 1.5. Alvarado argued that, regardless that no California law was on point, the scheme outlined in the DLSE Manual was more consistent with the stated California policy: A calculation should not result in the regular rate decreasing the longer the employee works.
Despite the fact that no California law was on point, the California Supreme Court last month reversed the prior trial court ruling that supported application of the federal rule. The Court relied on the “longstanding policy of discouraging employers from imposing overtime work.” The Court noted that it was obliged to favor an interpretation that discourages employers from imposing overtime work and that California’s labor laws should be liberally construed in favor of worker protections. The Court also stated that the Division of Labor Standards and Enforcement had special expertise and competence, and it adopted the DLSE Manual’s calculation.
Importantly, the Court denied Dart’s argument that due process required the new calculation formula to be applied only moving forward. Therefore, the required calculation method is retroactive. Private-side businesses that provide such flat sum bonuses should review their historic method of calculation to confirm it is in compliance. Businesses who are not in compliance should change their calculation methods and consult with an experienced employment attorney about taking remedial measures.
*Best Best & Krieger LLP represented Dart in this action.
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