Because There Is No California Law Specifying a Method for Computing Overtime on Flat Sum Bonuses, Company’s Overtime Formula Suffices if it Complies with Federal Law.
Alvarado v. Dart Container Corp. of Calif. (Jan. 14, 2016) 243 Cal.App.4th 1200
Plaintiff appealed summary judgment in Defendant’s favor on a single issue: whether the employer’s method for calculating overtime premium pay on flat sum bonuses paid in the same pay period in which they are earned complied with the law. Departing from the holding in Marin v. Costco Wholesale Corp. (2008) 169 Cal.App.4th 804 and invalidating the formula set forth in the Division of Labor Standards Enforcement (“DLSE”) Policies and Interpretations Manual, the Fourth District Court of Appeal held that Defendant’s formula, which complied with federal law, was sufficient.
Bonuses can be paid based on some percentage (or other aspect) of production, or they can be paid as a flat sum; in this case, Dart paid a bonus of $15 per day to those employees who worked a full shift on a Saturday or a Sunday, irrespective of the number of hours worked. Plaintiff earned bonuses throughout his employment in weeks he worked overtime (1.5 times regular rate of pay) and sometimes double time (2.0 times regular rate of pay).
Defendant used the following formula to calculate overtime:
- Multiply the number of overtime hours worked in a pay period by the straight hourly rate (straight hourly pay for overtime hours).
- Add the total amount owed in a pay period for (a) regular non-overtime work, (b) for extra pay such as attendance bonuses, and (c) overtime due from the first step. That total amount is divided by the total hours worked during the pay period. This amount is the employee’s “regular rate.”
- Multiply the number of overtime hours worked in a pay period by the employee’s regular rate, which is determined in step 2. This amount is then divided in half to obtain the “overtime premium” amount, which is multiplied by the total number of overtime hours worked in the pay period (overtime premium pay).
- Add the amount from step 1 to the amount in step 3 (total overtime pay). This overtime pay is added to the employee’s regular hourly pay and the attendance bonus.
Plaintiff argued Defendant’s formula diluted and reduced the regular rate of pay by lumping together overtime and regular hours when calculating the overtime rate on the flat sum bonuses and instead proposed the following formula, as set forth in the DLSE Manual and upheld in Marin:
- Multiply regular hours by the employee’s hourly rate (regular pay)
- Multiply overtime hours by the employee’s hourly rate (overtime pay on overtime hours)
- Divide flat sum bonus by regular hours (overtime rate), and multiply by 1.5 (overtime pay on bonus)
- Add pay for regular hours, bonus, overtime pay on overtime hours, and overtime pay on bonus (total pay).
The court of appeal held that federal law applied not because it preempted the California wage and hour framework (which it acknowledged was more protective than federal law) but because Plaintiff improperly relied on Skyline Homes, Inc. v. Dept. of Indus. Relations (1985) 165 Cal.App.3d 239, which the Alvarado court noted had specifically dealt with the calculation of overtime wages for salaried employees, not hourly employees. The appellate court also held that the DLSE Manual upon which Plaintiff relied was comprised of void regulations,[i] and that although courts must enforce the underlying wage orders upon which the DLSE’s policies are based, neither the DLSE Manual nor DLSE opinion letters are binding on courts.[ii]
Finally, the Fourth District distinguished the bonus in Marin as being interpreted a semi-annual bonus that was not paid in the same pay period as it was earned and which was primarily a production, as opposed to flat sum, bonus, and further distinguished that there was no applicable federal regulation, as here.[iii] Accordingly, the Alvarado court rejected the Marin court’s reliance on the DLSE Manual and ruled that it was reasonable to apply the federal law.
In a footnote, the court of appeal noted that Plaintiff raised a new theory at oral argument that the flat sum bonus was actually a salary rather than a bonus and therefore created a subterfuge whose purpose was to avoid paying overtime wages. The court declined to consider this argument as Plaintiff did not timely present it.
[i] Tidewater Marine Western, Inc. v. Bradshaw (1996) 14 Cal.4th 557, 571, 573.
[ii] Id. at 577; Brinker Rest. v. Super. Ct. (2012) 53 Cal.4th 1004, 1029, fn. 29; Morillion v. Royal Packing Co. (2000) 22 Cal.4th 575, 581.
[iii] 29 C.F.R. § 778.209(a).
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