California Court Approves FLSA Formula For Flat Bonuses

The California Court of Appeal provided employers with a small New Year’s gift for 2016: on January 14, in Alvarado v. Dart Container Corporation of California, it affirmed that an employer’s formula for calculating overtime, based upon federal law rather than upon a formula in the California Department of Labor Standards Enforcement (DLSE) Manual, was lawful. 

The plaintiff, Hector Alvarado, argued that the formula for calculating overtime violated California law and public policy because, in arriving at a “regular rate of pay” (the rate of pay upon which hourly overtime pay is based), his former employer, Dart Container Corporation divided his total compensation (including a flat attendance bonus—in this case, a flat bonus for working a weekend shift, regardless of any time worked beyond a full 8 hour shift) by the total number of hours worked, including overtime hours.  Alvarado further argued that, by including the total hours (versus regular hours), Dart was lowering his “regular rate”, which encouraged overtime work, whereas California public policy is to discourage overtime work.  In making this argument, Alvarado pointed to the DLSE’s Manual and its more employee-friendly formula for calculating a regular rate where flat bonuses are involved.  But the Court of Appeal correctly noted that the DLSE Manual is not law and is not binding, and that the employer had followed a federal law formula under the Fair Labor Standards Act (FLSA) in calculating overtime.  The Court then went on to reason that federal wage and hour law is controlling so long as there is no contrary California law that is more favorable to employees.  Since there was no such California law here, Dart’s formula for calculating an overtime rate was legal.

Before employers start clinking their glasses with leftover New Year’s Eve champagne, however, one must wonder how long it will be before the California Legislature scoops up the ball on this issue and creates California law where none presently exists.  Moreover, blind speculation aside, it is now a sobering fact (and law) that under recently revamped regulations from the U.S. Department of Labor, if approved, will make it such that any employee earning  less than $50,540 in salary annually no longer meets the “Salary Level Test” and is non-exempt (in other words, is now hourly) under the FLSA.

This is the rare case where federal law is now more favorable to employees than California law.  Thus, an employer’s overtime formula aside, the new year pulled a lot of employees over from the exempt to the non-exempt side of the ledger.  Payroll companies and time clock manufacturers are suddenly doing an ever-more-brisk business.

- Monte Grix

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