On March 5, 2018, the California Supreme Court issued its decision in Alvarado v. Dart Container Corp. of California, 2018 WL 1146645. The Court’s discussion of the proper means of calculating an employee’s “regular rate of pay” has raised questions among employers regarding the decision’s effect on the regular rate of pay used in piece-rate or hourly-plus production bonus structures. This article provides a brief summary of the Alvarado case, discusses its limited holdings, and analyzes the impact, if any, it has on piece-rate or hourly-plus-production pay structures.
In short, the case has no present impact on either piece-rate or hourly-plus-production compensation structures. Instead, the Court went out of its way to exclude these non-hourly payments from its holding, which was limited to flat-sum bonuses alone.
In Alvarado, the employee worked in the employer’s warehouse for just over a year. Per company policy, he was eligible for an attendance bonus of $15 per day (the “flat sum bonus”) whenever he was scheduled to work, and in fact completed, a Saturday or Sunday shift. This amount was paid regardless of whether that weekend shift included any overtime hours. Based on these facts, the Court applied Industrial Welfare Commission Wage Order 1 and explained that its analysis was “for the limited purpose of calculating overtime pay.”
Both the employer and employee agreed that the flat sum bonus must be factored into the employee’s “regular rate of pay” for calculating his overtime rate. They disagreed, however, over which number the bonus must be divided by – either (1) the number of total hours worked or (2) only the number of non-overtime hours worked – in calculating the hourly value of the flat-sum bonus.
The employee’s argument for the non-overtime-hours-only figure was based on guidance contained in the manual published by California’s Division of Labor Standards Enforcement (“DLSE”). On the other hand, the employer argued for the larger total hours worked number based on the federal Fair Labor Standards Act (“Act”).
THE COURT’S LIMITED HOLDINGS
The Court first held that the DLSE guidance was void as it was not promulgated pursuant to formal rule-making procedures. However, the Court then concluded that although the policy was not entitled to any special deference, it still contained a valid interpretation of the law in this case. The Court found that this interpretation was in line with established state policies disfavoring the imposition of overtime work and favoring worker protection.
The Court further found that because the bonus was not contingent upon the employee working any overtime hours, it should be treated as having been earned in any non-overtime hours worked as well. Therefore, the proper number to be used in the calculation is only non-overtime hours, resulting in a higher “regular rate of pay” and overtime premium than if the total number of hours worked were used. This shows how the flat-sum bonus is different from piecework or hourly plus production bonuses, which are directly affected by overtime hours worked.
Critically, the Court made very clear that its decision was limited “to flat sum bonuses comparable to the attendance bonus at issue here” and did not implicate “other types of nonhourly compensation, such as a production or piecework bonus…” which may warrant a different analysis. Id. at *27, fn. 5 (emphasis added).
The case understandably has many employers who make use of these payment structures on edge due to its use of the term “regular rate of pay.” However, while the Court left the door open for future analysis of these issues, the Alvarado decision has no present affect whatsoever on compensation structures other than flat sum bonuses.
While the case is less-than-ideal for employers who pay flat-sum bonuses to hourly, non-exempt employees, it has no present impact on employees paid under piece-rate or production bonus structures.
Kyle D. Kring is a Partner and Kerri N. Polizzi is an Associate of Kring & Chung, LLP. They can be reached at (949) 261-7700.