As employers, you know the importance of properly calculating and paying overtime (1.5 times the regular rate of pay) for non-exempt employees who work in excess of 8 hours per day or 40 hours per week. However, there are many tricky aspects to calculating both regular rates of pay and overtime, and failure to do so can have substantial penalties under both federal and California law. And, in a unanimous decision issued March 5, 2018, the California Supreme Court added another twist regarding the payment of “flat sum” or “flat rate” bonuses – fixed amount bonuses paid to employees in addition to their hourly wages in order to award those employees for things like attendance and performance (as opposed to production bonuses, piece work, and commissions).

The Case on Flat Rate Bonuses

In Alvarado v. Dart Container Corporation of California, the plaintiff, Hector Alvarado, was an hourly employee who, in addition to his normal hourly wages, received an “attendance bonus” if he was scheduled to work on a Saturday or Sunday. Alvarado was paid a flat sum bonus of $15 per day for each weekend day worked.

The defendant company, in determining Alvarado’s rate of pay, had divided Alvarado’s total compensation during a pay period (including straight time, overtime and flat rate bonus) by the total number of hours worked in order to determine the regular rate of pay. In other words, the amount of the flat rate bonus was divided over all hours, straight time and overtime, in determining Alvarado’s regular rate of pay.

In contrast, Alvarado argued that, in order to calculate his regular rate of pay and subsequent overtime, the flat rate bonus should only be divided by the number of non-overtime hours to determine his straight time rate, and then that rate should be used to determine his overtime rate.

The Supreme Court agreed with Alvarado, and ruled that when calculating overtime in pay periods in which an employee earns a flat rate bonus, employers must divide the total compensation earned in a pay period by only the non-overtime hours worked by an employee, and then use that rate to calculate overtime owed. The Court further determined that its holding would apply retroactively.

While the formula approved by the Court results in payments only “marginally more favorable to employees”, failure to use the proper calculation method could result in claims for failure to pay proper overtime, failure to provide complete and accurate wage statements, failure to timely pay all earned wages due at separation of employment and unfair business practices. In the event that you are an employer who utilizes flat sum or flat rate bonuses to award employees, and you believe that you have incorrectly calculated and paid overtime as a result, it’s important to speak to an attorney as soon as possible in order to avoid or minimize your liability.