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California Supreme Court Clarifies Overtime Calculations Involving Flat-Sum Bonuses

04/05/18

Author: ADP Admin/Thursday, April 5, 2018/Categories: State Compliance Update, California

The California Supreme Court recently issued a decision significantly impacting how employers must calculate overtime pay when non-exempt employees receive a flat-sum bonus. While the California Supreme Court Decision did not specifically define “Flat-Sum” bonuses in this decision, a variable bonus or other bonus type which is not set at a flat sum should generally not be the type of a bonus that would fall under the new guidance.

The Court ruled that when calculating overtime during pay periods when an employee received a flat-sum bonus, employers must divide the bonus by the number of non-overtime hours actually worked. As explained below, this decision effectively rejects the federal formula for calculating overtime when an employee receives a flat-sum bonus and may result in a higher regular rate of pay for overtime.

Background:
In California, employers must pay non-exempt employees 1.5 times their “regular rate of pay” for:
  • Hours worked in excess of eight in a workday;
  • More than 40 hours in a workweek; and
  • For the first eight hours of work performed on the seventh consecutive work day in a single workweek.
California also requires employers to pay non-exempt employees double their “regular rate of pay” for all hours worked in excess of:
  • 12 hours in any workday; and
  • Eight hours on the seventh consecutive work day in a workweek.
For the purposes of determining an employee’s regular rate of pay, employers must not only include hourly wages, but also nondiscretionary bonuses and certain other types of compensation. “Regular rate of pay” can change each pay period. Most bonuses are considered nondiscretionary, including those based upon hours worked, production, or proficiency.

Under federal law, employers determine the “regular rate of pay” by adding together total compensation earned in that workweek and dividing by the total hours worked in that workweek. If the employer is factoring in a bonus, the bonus is allocated over both non-overtime and overtime hours.

Example Using Federal Formula:
For example, if the employee earns an hourly wage of $12 and a $100 bonus in a workweek in which they worked 50 hours, this is how you would calculate overtime under the federal formula:

Step 1: Add straight-time hourly wages for all hours worked and bonus to determine total straight-time compensation.
($12 hourly rate x 50 hours worked) + $100 bonus = $700

Step 2: Divide total straight-time compensation by total hours worked to determine regular rate of pay.
$700 straight-time pay divided by 50 hours worked = $14

Step 3: Multiply regular rate of pay by .5 and then multiply by total overtime hours.
$14 regular rate of pay x .5 x 10 overtime hours = $70

Note: Since the straight-time earnings have already been calculated for all hours worked (see Step 1), the employee is entitled to an additional 10 hours of overtime pay, calculated at one-half the regular rate of pay.

Step 4: Calculate total compensation for week.
$70 overtime pay + $700 straight-time pay = $770

California Supreme Court Case:
The case before the California Supreme Court involved an employee who received a flat-sum bonus of $15 for every weekend shift he completed, regardless of whether he worked overtime in that workweek . To calculate the “regular rate of pay,” the employer followed the federal formula and allocated the bonus over the total number of hours worked in the workweek, including overtime hours. The employee argued that to calculate the “regular rate of pay” state law requires that the flat-sum bonus be allocated only over non-overtime hours worked in that workweek (that is, dividing it by no more than 40 hours).

The Court agreed with the employee, holding that the flat-sum bonus should be factored into an employee’s regular rate of pay by dividing the amount of the bonus by the total number of non-overtime hours actually worked during the relevant pay period. The employer should then use 1.5 (or 2 in certain cases), not 0.5, as the multiplier for determining the employee’s overtime pay rate.

Example Using State Formula:
Here is an example of calculating total compensation when an employee works overtime and receives a flat-sum bonus per the Court ruling. For this example (as above), the employee earns an hourly wage of $12 and a $100 flat-sum bonus in a workweek in which they worked 50 hours.

Step 1:  Divide the flat-sum bonus by the non-overtime hours worked.
$100 divided by 40 hours = $2.50 per-hour bonus

Step 2: Multiply the per-hour bonus by 1.5 and the hourly wage by 1.5 and then add those products.
$2.50 per-hour bonus x 1.5 = $3.75
$12 hourly wage x 1.5 = $18
Employee’s overtime pay rate = $21.75 (the regular rate of pay is $14.50)

Step 3: Multiply the employee’s overtime pay rate by the number of overtime hours.
$21.75 x 10 overtime hours = $217.50 in overtime compensation owed for hours 41-50

Step 4: Calculate total compensation.
$480 in hourly wages for hours 1-40 ($12 x 40 hours) + $100 bonus + $217.50 in overtime compensation for hours 41-50 = $797.50 in total compensation

Compliance Recommendations:
California employers that provide flat-sum bonuses should make sure they are calculating overtime in accordance with the California Supreme Court’s ruling. Since the Court also concluded that its ruling applies retroactively, employers should ensure past calculations comply as well.

Please reach out to your Payroll Service Representative to discuss how to calculate the regular rate of pay for flat-sum bonuses before submitting your payroll.
Click the link for the full opinion: http://www.courts.ca.gov/opinions/documents/S232607.PDF

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Tags: 04/05/18California

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