The California Supreme Court recently clarified how overtime premiums must be calculated and paid for employees who receive shift differential pay, flat sum bonuses, or similar incentives for working less attractive shifts or shifts scheduled at night or on weekends.
The Court’s opinion is found in Hector Alvarado v. Dart Container Corporation of California. The employer in this case paid employees flat sum bonuses for working weekend shifts as an incentive for showing up and working a weekend. These employees often worked overtime during the weekend shifts. The employer calculated and paid overtime premiums based on a federal regulation as California law was silent on the proper calculation method. The DLSE’s Enforcement Manual recommended a formula that differed from the federal regulation, but the employer declined to follow the DLSE’s recommendation as it was not binding law.
The federal regulation requires employers in this context to divide the employee’s compensation (including the flat sum bonus/shift differential pay) by the total hours worked by the employee to find the employee’s regular rate of pay. The DLSE’s recommendation was to divide the employee’s non-overtime hours worked in the applicable day by the total non-overtime compensation earned by the employee to find the employee’s regular rate of pay.
The Court held that the DLSE’s method is the appropriate method to calculate and pay overtime in this context as it is more favorable to employees.
The following is an example to illustrate the proper way to calculate overtime premiums in this context:
Employee earns $11.00 per hour as base/straight pay.
Employee earns $50.00 as a flat sum bonus for working a Saturday.
Employee works 10 hours on a Saturday.
Employees non-overtime compensation (for 8 hours of work) is $88.00 plus the bonus $50.00, or $133.00.
$133.00 divided by 8 hours worked is $16.625 (regular rate)
$16.625 times the overtime premium of 1.5 is $24.94 (overtime rate).
$24.94 times 2 hours of overtime is $49.88.
$49.88 of overtime pay plus $133.00 of non-overtime pay is $182.88 for the day.
Unfortunately, the Court stated that its ruling is to apply retroactively. All employers who have been following the federal regulations and not the DLSE’s method should contact us to discuss how to comply with this opinion.