A recent California Supreme Court opinion highlights how employers following federal law can run afoul of California wage and hour requirements.

The issue in Alvarado v. Dart Container Corporation of California involves overtime calculations and the “regular rate of pay.” Employees who earn overtime may be entitled to one-and-a-half times their regular rate of pay – a figure that may be different from the stated hourly rate because it includes other types of compensation such as shift differentials and lump-sum bonuses.

The suit focused on how to calculate the regular rate of pay when an employee is paid a flat-sum bonus. The employer argued that, consistent with the Fair Labor Standards Act (a federal law), the amount of the bonus should be divided by the total hours the employee worked in the pay period – including overtime hours. The employee argued that the bonus should only be spread across the non-overtime hours worked.

The California Supreme Court sided with the employee. “[W]e are obligated to prefer an interpretation that discourages employers from imposing overtime work and that favors the protection of the employee’s interests.” Since the approach urged by the plaintiffs was “marginally more favorable to employees,” the court adopted that approach.

To understand the effect of the ruling, consider this example. Suppose an employee works 90 hours in a two-week pay period (including 10 hours of overtime), and the employee receives $15 per hour and a $100 bonus. The value of the bonus must be calculated by dividing the $100 by the 80 non-overtime hours worked, which comes out to $1.25 per hour. This would then be added to the employee’s straight time rate for an effective regular rate of $16.25 per hour. Of course, the next step is to multiply the regular rate by 1.5 to obtain the basic overtime rate, and then multiply the number of overtime hours worked by the overtime rate.

To complicate things further, the court said that other types of bonuses may need to be treated differently. Alvarado involved a flat-sum bonus. The court distinguished that from bonuses that increase in rough proportion to the hours worked – such as piecework or commission bonuses. In those cases, the court stated, “the payment of the bonus itself constitutes base compensation, including base compensation for overtime work, in which case one might be able to argue that only the overtime premium need be added.”

In other words, different bonuses may require different overtime calculations. Adding insult to injury, the court held that its interpretation should be applied retroactively.

Takeaway: Employers with California operations need to be aware of the nuances of California law. Our publication Doing Business in California: A Guide for Employers highlights the unique aspects of California employment law.

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