By Chris Olmsted, Esq., Ogletree Deakins
Did you know that paying overtime at the proper rate is trickier than simply 1.5x or 2.0x? When non-exempt employees work overtime hours, the proper overtime rate should include not only the base hourly wage, but also certain types of additional wages, such as non-discretionary bonuses. Employers must properly calculate these overtime wages and yet, most unhelpfully, the state’s laws do not specify a method for calculating the proper rate. Noting this, a recent California appellate court clarified and confirmed the proper calculation in a case titled Alvarado v. Dart Container Corporation.
In that case, the company paid a $15 attendance bonus to any employee who worked a weekend shift. Alvarado worked such a shift during the workweek that included overtime hours. He filed a lawsuit alleging that the company incorrectly calculated the wages.
Company’s Method:
The company took all pay earned during the week (including the bonus) and divided by the number of hours worked in the week (including regular and overtime hours) to derive an average “regular rate.” The company then paid 0.5 of that rate for each overtime hour worked. Specifically, the company followed these steps:
- 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.
Employee’s Method:
The employee argued that he was shortchanged by the company’s calculation. He argued that to calculate overtime on the bonus, the bonus amount ($15) should be divided by the number of regular hours worked during the workweek (i.e. only 40 hours) and then multiplied by 1.5 (rather than 0.5).
The employee argued that including the OT hours in the divisor along with regular hours unfairly “dilutes” the regular rate.
Employee’s Method:
The employee argued that he was shortchanged by the company’s calculation. He argued that to calculate overtime on the bonus, the bonus amount ($15) should be divided by the number of regular hours worked during the workweek (i.e. only 40 hours) and then multiplied by 1.5 (rather than 0.5).
The employee argued that including the OT hours in the divisor along with regular hours unfairly “dilutes” the regular rate.
Court: Employer Got It Right
The appellate court noted that California law does not specify how to calculate the overtime rate for a flat non-discretionary bonus earned in one weekly period.
The court looked to federal law and found an applicable regulation: “Title 29 of the CFR section 778.209(a) provides the following formula for bonus overtime in general: “Where a bonus payment is considered a part of the regular rate at which an employee is employed, it must be included in computing his regular hourly rate of pay and overtime compensation. No difficulty arises in computing overtime compensation if the bonus covers only one weekly pay period. The amount of the bonus is merely added to the other earnings of the employee (except statutory exclusions) and the total divided by total hours worked.”
The court found nothing in California statutes or case law that specified any different rule. Citing authority which allowed for consideration of federal law in such circumstances, the court adopted the federal standard. In so doing, the court declined to follow guidelines issued by the California Division of Labor Standards Enforcement (DLSE) which the employee relied upon to make his case. The court determined that the DLSE’s method was unsupported by any legal authority. Accordingly, the employer’s calculation was deemed correct.
Different Calculation for Different Bonuses?
The court noted that its rule is specific to a flat sum bonus paid in the same period earned. The calculation may be different where a production bonus is earned over several pay periods and not paid in the same period earned.
Practical Tips
Where employees earn wages in any way other than at a regular hourly rate of pay, overtime pay calculations become complicated in California. This case helps define the proper calculation for one narrow and specific situation involving a flat bonus paid in the same workweek earned.
Employers should review their overtime pay calculations to ensure that the proper rate is paid. As this case demonstrates, the chosen calculation can become a subject of litigation.