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How to Calculate Overtime
for Employees who Earn
Non-Discretionary Flat Sum Bonuses

As you know, non-exempt employees in California are eligible to earn overtime for hours worked over eight in a workday or forty in a workweek.    

As you also know, the calculation of overtime requires multiplying the employee's "regular rate of pay" by the applicable formula.  Click here for a reminder on the basic rules for calculating overtime.  
What may be less commonly appreciated is that: where an employee earns a non-discretionary flat sum bonus (for example, an employee earns $15 for reporting to work on Saturday and Sunday), the regular rate of pay needs to take this non-discretionary flat sum bonus into account (in additional to base hourly wage) during the relevant pay period. 
Even more confusing, before today, the formula for calculating regular rate of pay in the case of a non-discretionary flat sum bonus was in dispute: the federal law formula conflicted with California's more employee-friendly methodology developed by the Division of Labor Standards Enforcement ("DLSE").  
This week, the California Supreme Court clarified the formula for calculating the regular rate of pay for purposes of calculating overtime compensation, by adopting the DLSE's employee-friendly formula. 
Specifically: when calculating the hourly value of the flat sum bonus for purposes of calculating the regular rate, the employer will divide the flat sum bonus amount earned in the pay period by only the non-overtime hours actually worked by the employee.  Alvarado v. Dart Container Corporation of California
Click here for an example of applying this formula.  
Be aware, the formula under federal law differs.  There, the regular rate of pay is calculated by dividing the flat sum bonus by the number of hours the employee actually worked in a pay period, including overtime hours, resulting in a lower regular rate of pay for overtime purposes when compared to the California formula (and less $$ to the employee as a result).
Additionally, the court held the formula applies retroactively.
What Does This Means to You?  Employers that pay non-discretionary bonuses should immediately perform an audit of their overtime pay practices to ensure they consistently align with the decision in Alvarado. The failure to do so exposes employers to the risk of claims for unpaid (including miscalculated) overtime, and all the penalties associated with those claims.
We are happy to help.  Let us know here if you would like our help to audit your existing practices, to determine and calculate any risk you may be facing, or to help you implement changes to reduce that risk, or give us a call at 619-906-2400.