California Supreme Court Rules that State Law Requires a Different Regular Rate of Pay Calculation than the Fair Labor Standards Act

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Date: Mar 7, 2018 01:11 PM
California Supreme Court Rules that State Law Requires a Different Regular Rate of Pay Calculation than the Fair Labor Standards Act

The post was authored by Lisa S. Charbonneau.

On March 5, 2018, the California Supreme Court issued a decision in the case Alvarado v. Dart Container Corporation, in which employee Hector Alvarado sued his employer under the California Labor Code for back overtime compensation under the theory that his employer had incorrectly calculated his “regular rate of pay.”

Under both the California Labor Code and the Federal Fair Labor Standards Act (FLSA), the regular rate of pay is the rate an employer must use to pay overtime premiums to employees who work overtime hours. The regular rate of pay can change from workweek to workweek because it must reflect the per-hour value of all compensation the employee has earned. This includes additional compensation an employee could earn on an hourly basis (e.g., shift differentials or on-call pay) and any non-hourly compensation an employee could earn (e.g., a flat dollar amount for a bonus or bilingual pay).  Specifically at issue in Alvarado was how to calculate the per-hour value of a lump sum bonus of $15 per day paid for work performed on a weekend day for purposes of the regular rate under California law.[1]

Regulations promulgated by the U.S. Department of Labor (DOL) unequivocally state how to calculate an employee’s regular rate under the FLSA when he or she is paid a lump sum bonus. As set forth in the DOL regulations at 29 C.F.R. section 778.110(b), to calculate the per-hour value of a lump sum bonus under the FLSA, an employer must divide the weekly bonus amount by the total hours actually worked by the employee in the week.[2]  In Alvarado, the employer followed the FLSA in its method of calculating the regular rate when an employee was paid the $15 per day bonus.  The plaintiff challenged this method as illegal under State law.

In a matter of first impression, the California Supreme Court in Alvarado departed from the Federal regular rate standard, opining that under State law, the per-hour value of a lump sum bonus such as that paid to Mr. Alvarado must be calculated by dividing the lump sum bonus by the number of non-overtime hours actually worked in the week.  Applied to the example in footnote 2, under California law as announced in Alvarado, to arrive at the per-hour value of the $75 bonus, the employer must divide the $75 by 40, the number of non-overtime hours actually worked in the week.  The California method results in a per-hour value of $1.88 (as opposed to the $1.50 result under the FLSA), which would be added to the $30 hourly rate for a regular rate of $31.88 (as opposed to the $31.50 result under the FLSA).

The California Supreme Court’s Alvarado decision is limited to flat-sum bonuses or pays (e.g., $75 a week, $300 per month or any flat dollar amount that can be converted into a weekly equivalent).   As such, other pays which are not flat-sum amounts are likely not covered by the decision.

The significance of Alvarado for private sector employers in California may be great where employers have been relying on the FLSA to incorporate non-discretionary lump sum bonuses (or other flat-sum payments) into the regular rate calculation.  The significance of Alvarado for most public sector employers, however, is negligible.  Although Alvarado sets a new standard for calculating the regular rate under the California Labor Code, most public sector agencies are exempt from the requirements of the California Labor Code and need only comply with the overtime requirements of the FLSA.  Indeed, for public sector employers, this decision offers clarity in that the California Supreme Court has confirmed that under the FLSA, the required regular rate divisor is that of all hours actually worked, not just all non-overtime hours worked.

This decision is also a reminder of the importance of clearly articulating negotiated forms of compensation in labor agreements. Failure to specify whether a payment is purely hourly, paid on a certain number of hours, or has no bearing on hours may have unintended FLSA regular rate consequences.  For example, if you do not intend on paying an agreed upon additional hourly pay for overtime hours, state that clearly in your MOU.

If you have questions about whether your agency is covered by State wage and hour laws and therefore subject to the holding in Alvarado v. Dart Container Corporation, or about any other aspect of this decision our attorneys are available to help with your questions.



[1] Under California and Federal law, non-discretionary bonuses must be included in the regular rate of pay. 

[2] For example, where an employee paid $30 per hour works 50 hours in a week and earns a bonus (or other lump sum includable in the regular rate) of $75 for the week, under the FLSA, the regular rate of pay is calculated as follows:  $30 x 50 = $1500 + 75 (for the additional bonus) = $1,575.00.  $1,575.00 divided by 50 = regular rate of pay of $31.50.  As you can see, under the FLSA, the per-hour value of the bonus is divided by the total hours actually worked by the employee.

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