California, Payroll

Correctly Calculating Overtime When Bonuses are Paid

Calculating overtime is always a source of litigation when you open most any law blog. Complicating the various methods of calculation required by either a federal or state law is the addition of payments such as bonuses which may affect the overtime rate. I came across this court case which nicely spelled out the calculations used federally and by the state of California. Read on and see if you would have chosen the correct method. Maybe you will learn something you never knew!

“Here’s one for the wage and hour folks.

In Alvarado v. Dart Container Corporation of California (Cal.App. 1/14/16), the defendant, Dart, paid its employees an “attendance bonus” for working a full Saturday or Sunday shift. The plaintiff filed a class and PAGA representative action, alleging that Dart failed to account properly for this bonus when calculating its employees’ overtime rates of pay properly. Dart used the following calculation:

1. Multiply the number of overtime hours worked in a pay period by the straight hourly rate (straight hourly pay for overtime hours). 

2. 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.” 

3. 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). 

4. 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 alleged that Dart should use the following calculation instead:

1. Multiply regular hours by the employee’s hourly rate (regular pay); 

2. Multiply overtime hours by the employee’s hourly rate (overtime pay on overtime hours); 

3. Divide flat sum bonus by regular hours (overtime rate), and multiply by 1.5 (overtime pay on bonus); 

4. Add pay for regular hours, bonus, overtime pay on overtime hours, overtime pay on bonus (total pay).

The trial court granted summary judgment for Dart, and the Court of Appeal affirmed, holding as follows:

Federal law requires payment of weekly overtime only and uses a “fluctuating workweek” method of calculating overtime wage rates. Although federal law does not address a daily flat sum bonus such as the one here, it does provide that a weekly bonus should be added to the weekly compensation, which is divided by the number of hours worked to arrive at the regular rate of compensation. 29 CFR 778.209(a). 

California law requires payment of daily overtime and does not follow the fluctuating workweek system. In this respect, California law is more protective of employees than federal law.

Federal law does not preempt more protective state wage and hour laws and would not preempt California law regulating overtime in this situation, if there were such law.

California law does not set forth a method of calculating overtime rates of pay based on daily flat sum bonuses such as the one here.

Skyline Homes v. DIR (1985) 165 Cal.App.3d 239, in which the court held that an employer may not use the fluctuating workweek method to calculate overtime rates for salaried employees, does not apply. Skyline was “confined to salaried employees working a fluctuating workweek, did not address bonuses, and dealt with an employer who failed to pay overtime for work exceeding eight hours in a day.”

Sections and 49.2.3 of the Division of Labor Standards Enforcement (DLSE) Enforcement Policies and Interpretations Manual provide a reasonable basis for calculating overtime rates. However, the DLSE Manual was not enacted in accordance with the Administrative Procedures Act, it does not carry the force of law, and it does not control here. 

Marin v. Costco Wholesale Corp. (2008) 169 Cal.App.4th 804 does not require adherence to the method set forth in the DLSE Manual. Marin considered a semi-annual bonus based on years of service and hours worked in the previous six months, rather than a flat sum bonus like the one here. No federal regulation applied in Marin, while 29 CFR section 788.209(a) applies here. Note: The Court here cites to CFR section 788.209(a), but this undoubtedly is a typo, and the Court meant to refer to section 778.209(a), discussed above.

Absent state law requiring use of the formula proposed by plaintiff, defendant properly used the formula stated in section 778.209(a).   The opinion is available here.”

Until Next Time, Be Audit-Secure!

Lisa Smith



Lisa Smith is CEO of Andere Seminars, LLC and Chief Content Developer at BeAuditSecure.com. Follow her on Twitter, connect with her on LinkedIn, listen to her Small Business Spoonfuls Podcast, and find more from her in Audit-Secure Authority at BeAuditSecure.com.

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