Want to give your employees a ‘flat sum’ bonus? Beware!

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Many Central Valley employers utilize bonus payments to motivate employees to work more safely, increase productivity, decrease absenteeism or to encourage other behaviors the employer views as beneficial.

However, such bonuses impact the “regular rate of pay” of workers, which in turn impacts the rate paid for overtime. The California Supreme Court recently issued a ruling that dramatically changes the way employers must calculate overtime payments when flat sum bonuses are provided. This article summarizes that decision. As always, this column does not substitute for the advice of legal counsel.

In the recent case, an employer paid a flat sum bonus of $15 to employees who were scheduled to work on a Saturday or Sunday, and who completed the full work shift.
In Alvarado v. Dart Container Corp. of California, there was no dispute that payment of this bonus then required a recalculation of the employee’s “regular rate of pay” for purposes of calculating overtime pay.

The court decided the following question: 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 (the method used under federal law, the Fair Labor Standards Act “FLSA”); (2) the number of non-overtime hours the employee worked during the pay period; or (3) the number of non-overtime hours that exist in the pay period, regardless of the number of hours the employee actually worked.
The court selected option two. Based on this divisor, the court concluded that a flat sum bonus is “factored into an employee’s regular rate of pay by dividing the amount of the bonus by the total number of non-overtime hours actually worked during the relevant pay period and using 1.5, not 0.5, as the multiplier for determining the employee’s overtime pay rate.”

The impact of the court’s decision is illustrated as follows:

Employee A earns $13 per hour, and works a standard 40-hour week, and a six-hour shift on Saturday. Employee A earns a $15 attendance bonus for the Saturday shift. To determine Employee A’s regular rate of pay, the $15 bonus is divided by the total non-overtime hours worked (40 hours) for a per-hour value of $0.38, giving the employee a regular rate of $13.38.

Employee B is also paid $13 per hour but works only 22 hours in the week. He too works a six-hour shift on Saturday, for which he earns a $15 attendance bonus. To determine Employee B’s regular rate of pay, the $15 bonus is divided by the total non-overtime hours worked (22 hours) for a per-hour value of $0.68, giving the employee a regular rate of $13.68.

If the bonus were calculated as permitted by the FLSA, the per-hour value of the bonus would be $0.33 for Employee A (not $0.38), and $0.63 for Employee B (not $0.68).
The Alvarado decision also requires that overtime on the bonus be paid at 1.5 times the regular rate derived from the bonus, not 0.5 times the regular rate as is permitted by the FLSA.

Focusing only on the pay derived from the bonus, under the FLSA method Employee A would be entitled to the $15 bonus plus an overtime premium of $0.99 ($0.33 FLSA regular rate x 0.5 x six hours of overtime = $0.99). By contrast, under the Alvarado method, Employee A would be entitled to receive the $15 bonus plus an overtime premium of $3.42 ($0.38 California regular rate x 1.5 x six hours overtime).

It is important to note that this decision applies only to flat-sum bonuses which are not tied to hours worked or to a particular amount of product produced. However, given the current focus on wage and hour issues in California, it is prudent for employers to take this opportunity to evaluate all bonus plans to ensure that the regular rate of pay is being properly calculated.

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