New ruling on bonus pay favors employees; here’s how it works

Last week, the California Supreme Court reversed an appellate court decision in Alvarado v. Dart Container Corporation of California -- which dictates how employers in the state should calculate certain types of bonuses. 2018 DJDAR 2083 (March 5, 2018).

The lower court had rule that a flat-sum bonus should be incorporated into the regular rate of pay by adding it into total compensation, then dividing by all hours worked.

However, the Supreme Court applied a questionable enforcement policy of the Division of Labor Standards Enforcement. Under the new ruling, employers are to divide total compensation by only regular (non-overtime) hours worked -- thus inflating the rate of pay and automatically exposing previously compliant employers to unexpected liability. Employers who've been paying under the former formula face potential liability going back years.

As some employers may have learned, any wage violation, no matter how small, can lead to attorney fees, "waiting time" penalties equal to 240 hours' worth of pay, and additional penalties under the Private Attorneys General Act. It does not take much imagination to consider the potentially staggering nature of the Supreme Court's blow to employers when one thinks about multiplying these penalties by the number of employees in a workforce and tacking on attorney fees.

Given the pro-employee bent of the California Legislature, there appears to be no relief in sight.

Remarkably, the decision could have been worse for employers. The bright side is that the Supreme Court stopped short of extending this formula to production bonuses, piecework compensation, or commissions. Instead, it limited its decision to flat sum bonuses like the one for attendance in this case, because other types of commissions and bonuses "may increase in size in rough proportion to the number of hours worked, including overtime hours," requiring a different result, whereas the weekend attendance bonus could be earned and payable even if the employee worked no overtime hours.

As the Supreme Court has not only adopted the labor division's position but also applied it retroactively, employers should immediately review their pay policies to identify any flat sum bonuses. Should any flat sum bonuses be found, employers who have not followed the division's formula must change their formulas, or may consider jettisoning flat-sum bonuses altogether and replacing this component of compensation with a commission or hours-based production bonus. Unfortunately, there is no guarantee that the Supreme Court will not eventually find new ways to punish employers, but staying vigilant and alert is the only way to try to remain compliant and avoid liability.

The case at hand originated with Hector Alvarado, a warehouse employee for Dart Container Corporation -- which manufactures food service products -- from 2010 to 2012. Dart provided a bonus to employees, on top of all of their other compensation, of $15 per day if they worked a Saturday or Sunday. A dispute arose over how to calculate an employee's "regular rate of pay" for purposes of calculating overtime compensation, where the bonus was not based on the number of hours worked on a Saturday or Sunday, but was paid as a flat fee for a completed weekend shift, regardless of its length.

The Department of Labor Standards Enforcement, a subagency of California's Department of Labor, is empowered to issue regulations interpreting the state's wage and hour laws, pursuant to the state's Administrative Procedure Act.

Where it purports to adopt a regulation without complying with the processes of the act, such regulation is entitled to "no weight" and is deemed void. Because the general purpose of California's wage and hour laws is similar to that of the federal Fair Labor Standards Act, which has been in place for longer than most California wage and hour laws and has experienced the development of a more extensive and nuanced set of regulations, California courts traditionally look to federal regulations where California has not duly enacted a law or promulgated an official regulation on a topic.

In the trial court, Dart sought summary judgment, arguing that in the absence of state authority, the federal regulation controls, and the above calculation is permissible. The trial court agreed and awarded summary judgment. In a rare victory for employers, Dart's "good deed" of providing a weekend bonus went unpunished, as the Court of Appeal affirmed in January 2016.

Employers celebrated this rare victory, and for the past two years have been able to follow Dart's example by rewarding employees for working weekends with a flat-sum bonus, confident that following official federal regulations would be enough to protect them from liability.

As so often happens, though, the party came to a crashing halt just two years later, when the California Supreme Court this week reversed, adopting the Department of Labor Standards Enforcement's "underground regulation" providing that, to calculate compensation, an employer must divide the flat sum bonus by only regular (non-overtime) hours worked in the pay period, then multiply the overtime bonus rate by 1.5 for all overtime hours worked.