©2024 Seyfarth Shaw LLP www.seyfarth.com 2024 Cal-Peculiarities | 247 Thus, while federal law would determine a regular bonus rate on a “flat sum” bonus by dividing the bonus by all hours worked and then multiplying the number of overtime hours by 0.5 times the regular rate to determine the amount of bonus overtime pay, California would more than triple the amount of bonus overtime pay, by requiring employers to divide the bonus by only the straight-time hours worked and then multiply the number of overtime hours by 1.5 times the regular bonus rate. In 2016, the Court of Appeal, in Alvarado v. Dart Container Corp., rejected the DLSE’s notion, holding that California law follows federal law as to calculating “flat sum” bonuses.423 The employer in Alvarado calculated weekly bonus overtime pay. The employer’s method essentially divided the $15 weekly bonus by all weekly hours worked (both straight-time and overtime) to yield a bonus regular rate, and then multiplied one-half that amount by the number of weekly overtime hours to produce the weekly bonus overtime pay. The plaintiff claimed that this method of compliance with the federal method failed to pay overtime premium pay due under Labor Code sections 510 and 1194. The employer prevailed on summary judgment. The trial court found no legal basis for the plaintiff’s proposed formula, because federal law did not conflict with the employer’s method, and because the plaintiff was relying on notions of California public policy lifted from a dictum in the DLSE Enforcement Manual that lacks any legally binding effect. Thus, the Court of Appeal affirmed the trial court’s sensible result, recognizing that California employers may use the federal method to calculate the overtime pay due on bonuses. But then the California Supreme Court intervened, to take review of the case.424 In 2018 the Supreme Court in Alvarado reversed.425 Exalting mechanical logic over practical reality, Alvarado endorsed the DLSE’s approach and thus required that the “flat sum” bonus be divided by just straight-time hours (not all hours) and that the resulting regular bonus rate be multiplied by the number of overtime hours and by 1.5, not 0.5. Alvarado rejected an approach that would divide the bonus by all hours worked, because that approach would result in a “progressively decreasing regular rate of pay as the number of overtime hours increases, thus undermining the state’s policy of discouraging overtime work.”426 This strictly logical approach blinks practical reality. Consider a worker earning a $15 bonus during a 50-hour week. By Alvarado’s reasoning, the federal method (dividing $15 by all 50 hours worked—yielding a bonus regular rate of $0.30, multiplied by 0.50 and 10 overtime hours to generate $1.50 in weekly bonus overtime pay) somehow would encourage the employer to create more overtime hours than if the employer used the DLSE method (dividing $15 by just the 40 hours of straight time—yielding a regular bonus rate of $0.375, multiplied by 1.50 and 10 overtime hours to generate $5.625 in weekly bonus overtime pay). Alvarado cited no evidence—in the form of an empirical study or otherwise—to support its speculation about an employer’s incentive to create overtime in this scenario. Nor had the DLSE provided any such evidence when it invented its peculiar “flat sum” bonus rule in the first place. Would an employer really create more overtime— paying time and one-half for each such hour—in order to dilute the bonus regular rate by a few cents? This practical consideration was something Alvarado’s theoretical musing did not begin to contemplate. In a remarkable concurring opinion, four of the seven Supreme Court justices acknowledged that the “spare language” of statutory law could have left employers “somewhat uncertain about how to proceed,” and that the DLSE Manual was not an “authoritative construction by a state agency.” The four concurring justices further acknowledged that employers who “fully intended to comply with state overtime laws” “may now be faced with substantial penalties”—an “unfortunate” state of affairs that “conceivably could have been avoided had an interpretative regulation of this subject been promulgated through formal APA rulemaking.” The concurring justices nonetheless agreed that Alvarado’s new interpretation should apply retroactively, even if, “[r]egrettably,” “more was not done to help employers meet their statutory responsibilities.”427
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