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Unpaid overtime is one of the most common wage and hour claims against employers and proper calculation of overtime pay can be extremely confusing. Employers often want to incentivize employees with bonuses, but unwittingly create increased exposure for failure to correctly pay overtime.

An example of how incentivizing employees could blow up in an employer’s face is the recent Supreme Court decision in Alvarado v. Dart Container Corporation of California. Defendant Dart Container is a manufacturer of food service products. Plaintiff Hector Alvarado was employed as a warehouse associate who was paid on an hourly basis and who, in addition to his normal hourly wages, received an “attendance bonus” of $15 per day that he was scheduled to, and did work, on a weekend day. He received the $15 flat rate bonus regardless of whether he merely completed the shift or exceeded the shift and worked overtime hours.

The gist of the dispute was this: How to calculate the regular rate of pay for purposes of calculating the overtime pay rate (generally, 1.5 times the regular rate of pay)?

The key distinction between the employer’s formula and the one advocated by the employee is whether the $15 bonus is allocated to all hours worked, including overtime hours (resulting in a lower rate), or only to the non-overtime hours worked (resulting in a slightly higher and therefore more benefitial rate for the employee).

The California Supreme Court sided with the employees on this one and ruled that when calculating overtime in pay periods in which an employee earns a flat rate bonus, employers must divide the total compensation earned in a pay period by only the non-overtime hours worked by an employee. This is a break from the federal manner of calculating overtime, which allows an employer to divide the total compensation by total hours worked to compute overtime pay.

PRACTICAL TIP: All California employers who pay flat rate bonuses should immediately review your policies and pay practices to ensure compliance with this decision. Since the decision applies retroactively, you may be exposed to liability and penalties based on past practices, which must be corrected immediately. This decision opens the doors for many more unpaid overtime lawsuits in the future.

Contact me at (949) 529-0007 if you have questions about overtime pay or questions about paying employees in general.

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