Counseling employers on wage matters after Alvarado v. Dart Container

Over two months ago, the California Supreme Court again reminded California employers that simply being compliant with federal wage standards does not shield them from liability under the Labor Code. In Alvarado v. Dart Container Corporation of California, 2018 DJDAR 2083 (March 5, 2018), the court reversed the court of appeal and determined that in computing an employee's overtime rate in a period in which a flat sum bonus was earned, only regular, non-overtime hours are to be used in the calculation.

Numerous articles and blogs on Alvarado have been have focused on the correct method of computation when a flat-sum bonus is paid and the retroactive application of the decision. But the more significant, long-range impact of the Alvarado pronouncement may prove to be three other key points in the decision: First, the court declared that state policy not only favors an eight-hour workday and a six-day, 40-hour week, but discourages employers from imposing overtime work in excess of those limits, and when one of two competing methods of computing overtime pay is available, the court will adopt the more costly one that puts more money in the pockets of employees and discourages the employer from assigning overtime. Trial courts may adopt this view in overtime disputes.

Second, the court will treat accurate interpretations of the law as binding and, moreover, retroactive even if they are found in sources that are otherwise void. And third, the court attempts to provide guidance to employment attorneys and their clients when relying on the policy interpretations of the Division of Labor Standards Enforcement found in the agency's manual and advice letters.

The dispute in Alvarado centered around a $15 fixed "attendance bonus" that Dart paid employees for each full shift they worked on a Saturday or Sunday. In the event an employee worked overtime in a week in which he or she received an attendance bonus, Dart calculated overtime according to federal regulations, dividing the total remuneration received by the employee by all hours worked. Plaintiff Hector Alvarado asserted, and the Supreme Court agreed, that the correct overtime formula that Dart was obligated to utilize was the one published in the DLSE Manual and, therefore, only the non-overtime hours actually worked in a week could be used in the calculation of overtime.

The Alvarado court recounted the long history of cases finding versions of the DLSE Manual a "void underground regulation" because they had been prepared internally, without input from employers, employees, or the public. The policies in the manual were deemed subject to the Administrative Procedure Act, but not adopted in accordance with its requirements and, as void regulations, not entitled to any deference. Tidewater Marine Western, Inc. v. Bradshaw, 14 Cal. 4th 557 (1996). Based on Tidewater, Dart argued that federal regulation was "persuasive guidance" because the only applicable California regulation found in the Manual was void.

The Supreme Court agreed that the one provision in the DLSE Manual addressing the calculation was "void," but it hedged by immediately clarifying that void "does not necessarily mean wrong" and that the DLSE's interpretation should not be flatly rejected by courts solely on the basis that a regulation was not adopted in accordance with the Administrative Procedure Act. The court stated that although not entitled to "special weight or deference," California courts should consider the DLSE interpretations on issues and adopt them as their own if they are so persuaded. "The court must consider independently how the governing statute or regulation should be interpreted" and in doing so an agency's underground interpretive regulation should not be afforded any special weight or deference." The court noted "the DLSE's expertise and special competence, as well as the fact that the DLSE Manual is a formal compilation that evidences considerable deliberation at the highest policymaking level of the agency" and advised that these considerations should be given due regard when courts are determining whether to adopt a DLSE policy as its own.

Attorneys advising clients on wage issues will necessarily be taxed to find the right answers to thorny issues somewhere on the spectrum between void underground regulations entitled to no or no special weight and the deference due to the DLSE Manual which might persuade a court that the agency's interpretation is correct and which the court may be persuaded to adopt. One touchstone that Alvarado notes as a turning point in persuasion is whether, when seeking guidance from the DLSE Manual, whether there are "references to prior decisions and advice letters that supported the various enforcement policies the manual set forth" since "such decisions and advice letters are entitled to the same degree of judicial deference that the underlying decisions or advice letters would receive." Presumably, if courts in making decisions find DLSE Manual provisions most persuasive when backed up by case citations or earlier advice letters, then attorneys advising clients may place greater reliance on provisions that have back up than those that do not. Of course, competent counsel will conduct thorough, independent research on all relevant statutes and governing case law regardless of whether a DLSE policy contains cites to prior decisions or advice letters.

Employers with California operations can take special heed where DLSE interpretations based on statutory, case law, or advice letter references are more protective for employees than federal guidelines. While it may be more costly to do so in some instances, adopting pay practices that are consistent with the relevant DLSE position may help in avoiding costly litigation.

One silver lining in Alvarado for employers: The holding was explicitly limited to "flat sum bonuses comparable to the attendance bonus at issue here." Thus, other bonuses that can increase as an employee works more hours in a week, such as a production or piecework bonus, may require a different analysis and ultimately may justify the use of an overtime formula that derives the regular rate of pay using total hours worked in the pay period, including overtime. These types of bonuses can fluctuate weekly depending on whether an employee satisfies specific eligibility criteria.

Bonuses are essentially creatures of contract as no employer is legally required to offer any type of bonus. However, once an employer decides to establish a bonus policy, it may be contractually obligated to pay bonuses out depending on the type of bonus that it offers. For reference, the DLSE defines a bonus as "money promised to an employee in addition to the monthly salary, hourly wage, commission or piece rate usually due as compensation." Bonuses fall into one of two categories: (1) non-discretionary; or (2) discretionary. If an employee earns a non-discretionary bonus, it likely constitutes an entitlement that must be paid out to the employee while a discretionary bonus creates no such obligation.

A non-discretionary bonus "may be a contractually required payment where a promise is made that a bonus will be paid in return for a specific result," such as exceeding a minimum sales or installation quota or remaining employed with a company for a specified amount of time. Typical examples of non-discretionary bonuses include flat sum like the one at issue in Alvarado, production, and piecework: all are tied to an employee achieving an identified goal.

A discretionary bonus is normally "in the form of a gratuity" where there is no promise of its payment and it is not based on any objective criteria. The quintessential example is a year-end holiday bonus that is paid for no reason other than generosity or to ease the burden of holiday-related expenses -- the payment is not contingent on any performance or work-related measures.

Given the choice in a vacuum, discretionary bonuses are preferable to their non-discretionary counterparts because they do not create an enforceable contractual obligation. However, non-discretionary bonuses tend to make more sense for businesses because they can provide benefits to both employers and employees by creating incentives that align with a company's interests and rewarding performance in furtherance of those incentives. Keeping in mind the limited applicability of Alvarado to flat sum bonuses only, California employers would be best served to reexamine their bonus policies to assess: (a) whether their current bonus structure offers non-discretionary or discretionary bonuses; (b) if they offer non-discretionary, whether the bonus is flat sum, or alternatively production or piecework; and finally, (c) if flat sum, whether revising the policy to provide for a production or piecework bonus in light of the Alvarado decision is a desired option.