California Supreme Court Rules on Non-Exempt Employee Bonuses

By: Jennifer Schumacher and Harrison Taylor

California non-exempt employees may have a new “regular rate of pay” following a recent California Supreme Court decision.  A non-exempt employee’s “regular rate of pay” is important because it is the basis for determining the non-exempt employee’s overtime pay rate, which in most instances is 1.5 times the non-exempt employee’s “regular rate of pay.”  Generally, a non-exempt employee’s “regular rate of pay” for a pay period includes the employee’s hourly wage and any nondiscretionary flat-sum bonus apportioned over the hours worked in the pay period and paid to the employee.  The question before the court in Alvarado v. Dart Container Corp., was how to apportion a nondiscretionary flat-sum bonus over the hours a non-exempt employee works in a pay period.

Under the Fair Labor Standards Act, the federal rule requires a flat-sum bonus to be divided by the total hours a non-exempt employee works in a pay period to determine the portion of the flat-sum bonus that is included in the non-exempt employee’s “regular rate of pay.”  For example, if a non-exempt employee is paid weekly, works 50 hours (10 hours of overtime), and receives a $40 nondiscretionary bonus for the week, her “regular rate of pay” will include $0.80 ($40 divided by 50 hours) from the nondiscretionary flat-sum bonus.

Declining to follow the federal rule, the Alvarado court set a new standard in California for apportioning nondiscretionary flat-sum bonuses to a non-exempt employee’s “regular rate of pay.” Now, flat-sum bonuses earned by a non-exempt employee in California will be divided only by the non-overtime hours worked by the non-exempt employee to determine the portion of the flat-sum bonus to be included in her “regular rate of pay.” Following the previous example, if a California non-exempt employee is paid weekly, works 50 hours (10 hours of overtime), and receives a $40 bonus for the week, her “regular rate of pay” will include $1.00 ($40 divided by 40 hours) from the nondiscretionary flat-sum bonus.

Although the Alvarado decision will have a direct impact on employers with employees in California, it serves as a reminder to all employers that nondiscretionary bonuses of any kind must be included in the calculation of non-exempt employees’ regular rate of pay for overtime compensation purposes.

Our Labor and Employment team provides a more in-depth discussion of the Alvarado case here.

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