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Paul Zimmerman

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Flat Rate Bonuses and Overtime Pay: Another Win for California Employees

The California Supreme Court has continued its employee-friendly ways. This time in Alvarado v. Dart Container Corp., 2018 Cal. LEXIS 1123 (Cal. Mar. 5, 2018), a case dealing with flat rate bonuses.

It’s not unusual for employers to pay such bonuses to employees – for instance, attendance bonuses for those scheduled to work undesirable shifts – in the same pay period in which an employee works overtime. But when they do, questions arise as to exactly how overtime is calculated.

Overtime in California is generally compensated at 1.5 times the “regular rate” for all hours worked in excess of 8 hours a day or 40 hours in a week. Under the Fair Labor Standards Act (FLSA), to compute an employee’s regular rate of pay for purposes of calculating overtime, total compensation for a given pay period is divided by the total hours that employee has worked (both overtime and non-overtime). Of note, the “regular rate” of pay includes “straight time,” shift premiums, non-discretionary bonuses and other compensation earned during the pay period. What has remained unclear is how flat rate bonuses – those not based on the number of hours worked – factor into the overtime equation. With Alvarado, the California Supreme Court has spoken on the issue, and to the extent the formula it has applied nominally benefits employees, labor is left smiling.

The ruling requires employers calculating overtime in pay periods in which an employee earns a flat rate bonus to abide by the guidance set forth in the California Division of Labor Standards Enforcement (DLSE). More specifically, in these circumstances, employers must now divide the total compensation an employee earns during such a pay period by only the non-overtime hours (as opposed to total hours) worked. The upshot is that this smaller denominator equates to the benefit of a slightly higher “regular rate” of pay and, therefore, a slightly increased overtime rate.

The impact of the decision in Alvarado can be detrimental to California employers who pay flat rate bonuses, especially since the ruling applies retroactively. Consequently, affected employers are encouraged to review their current payroll practices and make any necessary changes to overtime calculations.

This blog post is not offered as, and should not be relied on as, legal advice. You should consult an attorney for advice in specific situations.