CA Supreme Court Decision Regarding Bonus Payments to Employees

On March 5, 2018, the California Supreme Court finally weighed in with regard to how overtime must be calculated when an employee is paid a flat-sum bonus.  The Court determined that the DLSE flat-sum bonus formula is the proper method for calculating overtime, rather than the formula used under federal law (and previously adopted by the lower court in Alvarado).  Importantly, the California Supreme Court also determined that this ruling will apply retroactively.  This means that employers may face significant penalties if bonus payments were not calculated properly while the Alvarado decision was pending. 

As most California employers know, when an employee is paid a non-discretionary bonus additional overtime payments are triggered.  This is because the bonus payment has the effect of increasing the employee’s “regular rate of pay” which is used to calculate overtime.  Depending on the type of bonus (ie, production bonus versus flat-sum bonus) different formulas are required for calculating the additional overtime obligations. 

In Alvarado v. Dart, the California Supreme Court considered the formula required for flat-sum bonuses.  A flat-sum bonus is a bonus paid at a fixed or pre-determined amount which does not increase or decrease.  Examples of a flat-sum bonus might include $20 for each holiday worked or $500 for working through the end of the season. 

In reaching its decision, the California Supreme Court reasoned that a flat-sum bonus only rewards an employee for straight time hours worked.  As such, the Court held that the proper formula for determining the per-hour value of a flat-sum bonus is to divide the bonus amount by the number of straight time hours that the employee actually worked during the bonus period.  This amount is the bonus rate that is used to calculate overtime during the bonus period.  The bonus rate must be multiplied by 1.5 (for time and a half) or by 2 (for double-time) and then multiplied by the number of OT or DT hours worked. Note however, that this formula only applies to flat-sum bonuses.  Production bonuses (ie, bonuses that are based on a percentage or formula where the bonus amount can increase if the employee works additional time) are calculated using a different overtime formula.

Perhaps most troubling is the fact that the Court determined that this ruling applies retroactively.  This means that employees who were previously calculating bonus overtime under the less cumbersome federal formula may face substantial penalties for those practices.  Employers are encouraged to review non-discretionary bonus practices and ensure that employees are properly compensated for any overtime hours during the bonus period.  Please contact our office if you have questions about your bonus practices and/or overtime calculations.

A link to the Court’s decision is available below.