Revisiting Alvarado: “Work Week v. Pay Period” Question Remains

Diane Marie O'Malley Dorothy Liu 
Diane Marie O'Malley and Dorothy Liu
June 6, 2018

“The California Supreme Court Modifies Its Opinion in Alvarado v. Dart  Container Corporation, 4 Cal.5th 542 (2018) only to leave open the ‘workweek v. pay period’ regular rate calculation question.”

Things couldn’t get much worse for employers in the area of calculating the regular rate of pay – a complicated operation even on a good day. The California Supreme Court just made the calculation murkier when it modified its March 5, 2018 Alvarado v. Dart  Container Corporation opinion.

We recently reported that, on March 5, 2018, the California Supreme Court issued its long awaited overtime calculation decision in Alvarado v. Dart  Container Corporation.  The specific question before the Court was “how an employee’s overtime pay rate should be calculated when the employee has earned a flat sum bonus during a single pay period.”

To recap briefly, in Alvarado, a group of employees who received a flat sum bonus for working on a weekend filed a class action arguing that the employer must allocate the bonus only to non-overtime, regular hours worked during the pay period when determining the regular rate of pay for any overtime calculations. Plaintiff Alvarado relied upon a Division of Labor Standards Enforcement (DLSE) Manual policy, which directly addressed the issue. Following federal law, Dart Container had allocated the bonus to all hours worked, thus including overtime hours.

The California Supreme Court agreed with Plaintiff Alvarado finding that, when allocating a flat sum bonus, an employer must allocate that bonus only to non-overtime, regular hours worked in a pay period.

Questions cropped up immediately as the Court specifically discussed calculating the per-hour value within a  pay period.  As employers know, overtime is calculated on a workweek basis, not a pay period basis.  However, a bonus earned over a time period longer than a workweek is apportioned over that time period. DLSE Manual Section 49.2.4.1. On March 22, 2018, the California Employment Law Council filed an Amicus Letter Requesting Clarification and/or Modification of the Court’s Order. In its Amicus Letter, the Council sought clarification regarding what seemed to be the Court’s suggestion that “employers should calculate the regular rate of pay for overtime compensation for each pay period, rather than each individual work week within the pay period.” (Amicus Letter, p. 1) The Council sought modification of the Court’s decision by changing the term “pay period” to “workweek or other period over which the bonus is earned.” (Amicus Letter, p. 3)

On April 25, 2018, the Court issued a modified opinion, which denied the Council’s Request and stated:

On page 551 of the published opinion, a footnote is inserted at the end of the sentence that reads: “Plaintiff’s formula turns out to be marginally more favorable to employees; the key distinction between the two formulas is whether the bonus is allocated to all hours worked, or only to the nonovertime hours worked.” The new footnote, which is numbered as footnote 2, reads: “Defendant’s formula and plaintiff’s formula have one thing in common: both use  the pay period as the basis for calculating an employee’s regular rate of pay. In  other words, neither party suggests that regular rate of pay should be calculated on  a workweek basis, which might result in an employee having two or more regular  rates of pay in a single pay period. This opinion follows the lead of the parties in  using the pay period as the basis for calculating regular rate of pay, but we did no grant review to decide whether, under California law, regular rate of pay is properly calculated on a pay-period basis or a workweek basis, and nothing in this opinion should be interpreted as deciding that question.” (emphasis added) Alvarado v. Dart  Container Corporation, Case No. S232607 (Cal. Sup. Ct, April 25, 2018)

Unfortunately, the Court  leaves the “workweek v. pay period” question  for another day.  Thus, employers are well advised to seek their labor counsel’s advice regarding that question when employers are re-working their payroll systems to comply with Alvarado’s mandate that they use only non-overtime hours as the divisor for purposes of calculating the per-hour value of the bonus.