Last week the California Supreme Court provided clarity to employers regarding how non-exempt employees who are paid bonuses should be paid. Under both federal and state law, employers are required to pay overtime at a premium of the "regular rate of pay." Despite appearances, the phrase "regular rate of pay" does not mean the normal hourly rate. The regular rate of pay must include most forms of remuneration that a non-exempt employee receives. For example, flat sum bonuses awarded for performance must be factored into the "regular rate of pay" before the employee's overtime rate is determined.
Why is it important to get the calculation right? If an employer fails to correctly calculate the employee's regular rate of pay, the overtime rate will be off. If the overtime rate is lower than it should be if the proper calculation were used, the result could be underpayment of employee wages for pay periods in which the employee worked overtime. And of course, depending on how the longer the calculation was incorrect and how many employees were affected, those unpaid wages can really add up.
In Alvarado v. Dart Container Corp., the California Supreme Court rejected the federal approach to calculating the regular rate of pay in favor of an approach that is more favorable to employees. Under the federal calculation, the regular rate of pay calculation factors in a bonus by dividing the bonus amount by all hours worked in the period the bonus was earned, non-overtime hours and overtime hours. In rejecting the federal approach, the California Supreme Court held that an employer must divide a flat-sum bonus by only the non-overtime hours worked during the period, not by all hours. This will result in a greater regular rate of pay. Finally, the Supreme Court also held that this rule applies retroactively, so there is no safe harbor for employers who may have believed they were doing it correctly by following the federal approach.
Often this is not a simple or easy calculation. Moreover, there is additional complexity regarding what kinds of remuneration must be factored into the regular rate calculation at all. Employers would be wise to consult with their employment counsel if there is uncertainty regarding whether the calculation is being done properly.