On March 5th 2018, in the Supreme Court of California, the case of Hector Alvarado v Dart Container Corporation of California was decided – by the reversal of the previous judgment of the Court of Appeal.

The case was decided on how an employee's overtime pay rate should be calculated when the employee had earned a flat sum bonus during a single pay period.   Specifically, it was considered as to whether the manner of calculating the per-hour value of the bonus should be:

• the number of hours the employee actually worked during the pay period, including overtime hours
• the number of non-overtime hours the employee worked during the pay period
• the number of non-overtime hours that exist in the pay period, regardless of the number of hours the employee actually worked.

The conclusion was the second of these options.

Hector Alvarado worked for Dart as a warehouse associate in California. He was, together with other nonexempt warehouse associates, paid on an hourly basis and received a flat-sum attendance bonus of $15 if he completed a full shift on a Saturday or Sunday.

Hector Alvarado brought a lawsuit against Dart alleging that it failed to properly calculate and pay overtime wages to him and to similarly placed employees.

He claimed that Dart calculated an employee's overtime compensation by dividing the amount of the bonus by the sum of all the hours the employee worked - as opposed to dividing the amount of the bonus by the non-overtime hours worked.

Dart had maintained that they used this long-accepted methodology set forth in the federal regulations - Fair Labor Standards Act (FLSA). These regulations provide that the "regular rate of pay" for calculating overtime must be determined by dividing the sum of all remuneration by the total hours worked, including any overtime hours.

However, Hector Alvarado contended that Dart should have followed the method set out in the California Division of Labor Standards Enforcement's "Enforcement Policy and Interpretations Manual" (DLSE manual).  This states that the rate should be arrived at by dividing the bonus amount by only the non-overtime hours worked. For a full-time employee, this would be a maximum of 40 hours a week. 

The trial court had agreed with Dart and – at a later hearing – the Appeal Court affirmed the ruling, stating that there was no valid California law or regulation explaining how to factor a flat-sum bonus into an employee's regular rate for purposes of computing and paying overtime wages. The trial court noted that the DLSE manual is not binding and in the absence of any binding California law or regulation, they concluded that Dart was permitted to follow the relevant FLSA regulation.

The Supreme Court agreed with the lower courts' finding that the DLSE manual was not binding authority but, however, they believed that the DLSE's interpretation of that controlling state law may be influential. They also observed that it was bound to favor an interpretation implying that the principles of California law discourages employers from imposing overtime work - by making overtime as costly as possible - and that California's labor laws should be liberally construed in favor of workers.  It also rejected pleas by Dart that it would be unfair to impose this new rule retrospectively.

As a result - to conform to Californian payroll practices - special attention is necessary by employers.