California iStock_000015398858_LargeA California court of appeal has addressed a gap in California law to clarify what can be a tricky problem for employers — how to calculate overtime on bonuses of a fixed amount, or “flat sum” bonuses. The court’s answer can be summarized in three words: Follow federal law.

The dispute in Hector Alvarado v. Dart Container Corporation of California, No. E061645, centered on an attendance bonus. The company paid a $15 bonus when an employee completed a scheduled shift on a Saturday or a Sunday, regardless of how many hours the employee worked. The plaintiff had challenged the company’s formula for calculating overtime pay. One difficulty in calculating overtime pay is that it must be based on the “regular rate” of pay, which is the compensation an employee normally earns for work performed. A nondiscretionary bonus must be included in calculating the regular rate of pay.

The company had used the following formula to calculate the amount of overtime paid on the attendance bonuses (as quoted from the court opinion):

  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.

In its opinion, the Court of Appeal for the Fourth Appellate District noted that this formula is consistent with the formula in Title 29 of the Code of Federal Regulations section 778.209(a) for bonus overtime in general.

The plaintiff argued that the company should have instead used a formula from Division of Labor Standards Enforcement (“DLSE”) Manual sections and The California DLSE is the agency that enforces California’s labor laws. One of the plaintiff’s arguments was that the company’s method of calculation “dilutes and reduces the regular rate of pay by including overtime hours when calculating the regular rate of pay used to compute overtime on plaintiff’s flat sum bonuses.” This, the plaintiff argued, “violates California policy, in which overtime is discouraged.”

The court found that the DLSE Manual provisions were not enforceable. Citing Tidewater Marine Western, Inc. v. Bradshaw (1996) 14 Cal.4th 557, the court noted that the DLSE Manual was prepared “without input from affected employers, employees, or the public generally” and was not adopted in accordance with the Administrative Procedure Act rulemaking procedures, and as such, the provisions in the manual “are void regulations which are not binding on this court.” The court agreed with the trial court that there is no California law specifying a formula to compute overtime on a flat sum bonus. The company’s formula complied with federal law, and as such, the court decided, it was permissible.

Practice Pointer: Related to this, employers that pay a flat sum for varying amounts of overtime should bear in mind that under 29 C.F.R. § 778.310, such a payment “does not qualify as an overtime premium even though the amount of money may be equal to or greater than the sum owed on a per hour basis.” If an employer pays a flat sum for work performed in overtime hours, the employer must include the sum in the regular rate. The flat sum may not be credited against overtime pay.

This opinion provides employers with much-needed guidance in calculating overtime payments when paying flat sum bonuses. When federal and state laws conflict, employers must follow the law that provides the most benefit to employees — which is usually California law. When calculating overtime on flat sum bonuses, however, federal law applies.