California already has one of the most generous and employee-friendly overtime laws in the country. Employees in California earn overtime anytime they work over 8 hours in a day OR 40 hours in a week. Overtime is paid at 1.5 times the employee’s regular “rate of pay.”
Calculating an Employee’s Regular Rate of Pay
But, what is an employee’s regular rate of pay? Is it just his or her regular hourly wage? What if an employee earns commissions during a pay period — are those included in calculating the employee’s regular rate of pay? What if an employee gets paid different hourly rates for doing different jobs — what is that employee’s regular rate of pay then? There are many scenarios like this that create traps for employers that result in improper overtime calculations.
The California Supreme Court Weighs In
Recently, in Alvarado v. Dart Container Corp., the California Supreme Court clarified the overtime calculation process in one common situation — when an employee works overtime during a pay period but also receives a lump-sum bonus. The Court concluded that the lump-sum bonus amount is part of the employee’s wage and, therefore, the employee’s regular rate of pay for that pay period must include that bonus payment.
But how does that bonus payment get included? The Court considered three different options — specifically, whether that bonus payment should be spread over (a) all hours worked by the employee during the pay period, including overtime hours, (b) the number of non-overtime hours worked by the employee during the pay period, or (c) the number of non-overtime hours that exist in the pay period, regardless of how many the employee actually worked.
The Court concluded that the proper calculation is (b). The bonus amount is divided by the number of non-overtime hours worked by the employee to get the amount of the bonus per hour. Then, that number is added to employee’s regular hourly wage to arrive at the employee’s “rate of pay.” That figure is then multiplied by 1.5 to arrive at the employee’s overtime pay.
Doing the Math
For example, assume that an employee earns $40 per hour as her regular wage. Assume also that the employee worked 50 hours last week. Assume also that the employer paid the employee a flat $1,000 bonus last week for managing a successful product launch. When the employer is doing payroll, how much overtime is the employee owed? Many employers would calculate her overtime to be 10 hours overtime worked X $40 per hour X 1.5 overtime, or $600.
But this is incorrect. According to the California Supreme Court, the proper calculation must include the $1,000 bonus payment. That $1,000 is spread over the employee’s 40 hours of non-overtime worked, which adds an additional $25 to her hourly wage. The employee’s regular rate of pay is therefore $40 per hour + $25 per hour, or $65.00 per hour. Given that she worked 10 hours of overtime, the employer would therefore owe the employee 10 hours X $65 per hour X 1.5 overtime, or $975.
An Added Complication — Retroactive Application
The Court also made its ruling apply retroactively. So California employers not only have to do new overtime calculations going forward, but they have to look backward as well and make additional payments to an employee is owed more overtime under this new calculation.
You can read the California Supreme Court’s full opinion in Alvarado v. Dart Container Corp. here.
