Computing Overtime Pay When The Employee Is Also Paid Flat Sum Bonus

How should a worker’s “regular rate of pay” be computed when the worker receives a flat sum bonus in addition to an hourly wage?

The answer is crucial since, under California law, an employer must pay a worker 1.5 times the worker’s “regular rate of pay” for “overtime”—that is, work in excess of 8 hours in a day, 40 hours in a week, or for work on a 7th consecutive day.

On March 5, 2018, the California Supreme Court answered the question. In Alvarado v. v. Dart Container Corp. (2018) 4 Cal.5th 542, the court held that the flat sum bonus must be divided by the number of non-overtime hours the employee actually worked during the pay period. That amount plus the worker’s regular hourly pay is his or her “regular rate of pay” which must be multiplied by 1.5 to compute the legally required rate of overtime pay.

For example, if the worker works 35 non-overtime hours and 5 overtime hours during the pay period, earning $10 per hour regular pay plus a $15 bonus for working on a Saturday or Sunday, his or her “regular rate of pay” is $10.43 per hour ($10 + ($15/35)). The worker is entitled to overtime premium pay at the rate of $15.65 per hour (1.5 x $10.43), or $78.25 for 5 hours of overtime work.

The employer in Alvarado had computed the workers’ “regular rate of pay” by dividing the flat sum bonus by total hours worked during the pay period—including both overtime and non-overtime hours. By doing so the employer derived a lower hourly rate of pay and so also paid less for overtime work. This, the Supreme Court held, was contrary to the rule that state labor laws are to be liberally construed in favor of employees and to law’s purpose of discouraging employers from requiring employees to work overtime.

California employers who pay or paid flat sum amounts to non-exempt employees should check to make sure they are computing “regular rate of pay” and thus minimum overtime hourly pay in accordance with the computation method adopted in Alvarado. Alvarado governs overtime pay for past as well as future pay periods. To avoid future litigation, employers who used a different method of computing overtime pay in the past should consider voluntarily paying workers any shortage of overtime pay during the last four years.