It is an old joke that the world can be divided into people who are good at math and those who go to law school.  Whether you believe the joke or not, math – or in this case, simple arithmetic – can be at the heart of many wage and hour questions.  On March 5, 2018, the California Supreme Court issued an opinion in Alvarado v. Dart Container Corp.  The Court articulated a rule on how an employee’s overtime pay rate should be calculated when the employee has earned a flat sum bonus during a single pay period.  Please be aware of the emphasized language:  flat sum bonus.

The Supreme Court’s decision in Alvarado details the procedure for applying a “flat sum bonus” in determining the regular rate of pay for purposes of overtime.  The “regular rate of pay” is the pay rate which is multiplied by the applicable overtime premium (time and a half or double time).   The Court relies heavily on the Department of Labor Standards Enforcement (“DLSE”) Enforcement Manual.  That manual divides the world of regular rate calculations involving bonus and incentive payments into two categories:  (1) those that are “production or commission based;” and (2) those that are paid as a flat sum.  In Alvarado, the flat sum bonus was an attendance bonus paid by the employer to employees who met the company’s attendance incentive goals.  

The question was how are these non-hourly rate wages properly included in calculation of the regular rate.  The DLSE Enforcement Manual outlines acceptable approaches for including such bonus and incentive payments into the regular rate calculation.  Simply put, the law requires periodic bonus commission payments earned in a particular pay period be included in the determination of the “regular rate of pay” prior to calculating the overtime premium payment.  These sums are added to the regularly earned wages and then divided by a divisor to determine the “regular rate of pay.”  The question considered by the Alvarado Court is to what that divisor should be.  As the Court put it:

Specifically, we consider whether the divisor for purposes of calculating the per-hour value of the bonus should be (1) the number of hours the employee actually worked during the pay period, including overtime hours; (2) the number of nonovertime hours the employee worked during the pay period; or (3) the number of nonovertime hours that exist in the pay period, regardless of the number of hours the employee actually worked.

The Court concluded that the divisor should be the second of these options.  That is, dividing the flat sum bonus received in the pay period by the number of non-overtime hours the employee worked during the pay period.

The case did not consider how production based or non “flat sum” bonuses should be included in calculation of the regular rate of pay. The Court’s rationale in Alvarado, however, lends credence to the methods of calculation outlined in the DLSE Enforcement Manual at section :

Compute the regular rate by dividing the total earnings for the week, including earnings during overtime hours, by the total hours worked during the week, including the overtime hours.

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What this means is that if employees receive a flat sum bonus – one not tied to productive activity or sales activity (such as commissions) the total earnings for the pay period are divided by the total hours of regular work in the week (excluding overtime).  A different rule applies for production bonus workers or commission workers which requires that all wages for the pay period be divided by the total hours worked during the pay period, including overtime hours.