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Follow up About CA Supreme Court’s Dart Decision re Regular Rates of Pay

by D. Gregory Valenza | | March 7, 2018

A colleague wrote re my post about Alvarado v. Dart Container Corp. (Original post here). I know, I was surprised someone read it, too.  Anyway, she identified a pretty glaring error in the analysis.  Before you point and laugh, the error wasn’t mine, but rather the Court’s.  My sin was not calling it out.  I promised to post a follow up. So, here goes.

The issue is that the Court in its opinion repeatedly refers to “pay periods” as the time period basis for calculating regular rates. For example – 

we decide how an employee’s overtime pay rate should be calculated when the employee has earned a flat sum bonus during a single pay period.

we consider whether the divisor for purposes of calculating the per-hour value of the bonus should be (1) the number of hours the employee actually worked during the pay period, including overtime hours; (2) the number of nonovertime hours the employee worked during the pay period; or (3) the number of nonovertime hours that exist in the pay period, regardless of the number of hours the employee actually worked. We conclude that the divisor should be the second of these options.

Regular rate of pay, which can change from pay period to pay period . . .

You get the idea.  But my colleague was right. The Court’s use of “pay period” is – unusual – in the context of calculating the regular rate.  in wage hour parlance, “pay period” generally means the period for which an employee is paid, not the workweek.  A pay period is not necessarily two 40-hour weeks, either;  that is a “bi-weekly” pay period. California prescribes different types of “pay periods,” including weekly and semimonthly.  See Lab. Code section 204.  So, a “semi-monthly” pay period may include portions of 3 different work weeks. 

“Workweek,” though, is defined as a predetermined seven day period that does not vary from week to week. The problem is that whether someone works “overtime”  (meaning over 40 hours in a workweek), is determined on a workweek basis.  The regular rate is supposed to correspond to the workweek in which the overtime is worked.  

Why does this matter?  Well, under the federal Fair Labor Standards Act, the regular rate is calculated on a workweek by workweek basis.  

The regular hourly rate of pay of an employee is determined by dividing his total remuneration for employment (except statutory exclusions) in any workweek by the total number of hours actually worked by him in that workweek for which such compensation was paid.

See 29 CFR §778.109.

Can one simply ignore federal law?  Not when federal law is more generous to employees than state law.  And that is possible when one calculates the regular rate based on a “pay period” rather than a work week. If an employer were to calculate an “average”  regular rate for a two-week “pay period,” the calculation may be inaccurate under federal law.  If the calculation under federal law were to result in higher overtime pay for the employee, California law would be required to yield.  

Let’s say there is a bi-weekly pay period (two seven-day weeks).  If an employee works no overtime during workweek #1 and earns only hourly pay, and the employee works huge overtime in workweek #2 and is paid hourly pay plus substantial bonuses, the regular rate should be higher in week 2.  Why? Because the bonus value would be divided only among the hours in week 2.  

Consider also a person who works at multiple rates.  If the employee works at a high rate in week 1 and works overtime, and a low rate in week 2 but works no overtime, a “pay period” based overtime pay will be lower than if it’s calculated workweek by workweek.

So, dividing the bonus value over the hours worked in the “pay period” seems to be what the Court in Dart held was appropriate. But doing so could violate the FLSA. I can’t help pointing out that is ironic given the Court’s language about how California wage-hour law is intended to provide greater protection to employees.  That’s why I don’t get invited to parties. Well, one reason anyway.

Even the DLSE in its Manual contemplates calculating the regular rate on a workweek basis, e.g., See DLSE Enforcement and Interpretations Manual, 49.1.4, 49.2.5, etc.  So, if the DLSE Manual is correct regarding how to calculate the regular rate applicable to certain fixed bonuses, as the Court held in Dart, then isn’t the DLSE also correct that the workweek-based regular rate is the correct method of calculation in California? 

It may be the Court used “pay period” in a generic or colloquial sense and intended to calculate the regular rate on a workweek basis. But  pay period is a term of art, as is workweek. The Court should correct its opinion to avoid even more confusion. Hopefully the employer’s lawyers are all over this. While they’re at it, maybe they can ask for rehearing to argue the DLSE also wrote in its Manual that the Industrial Welfare Commission intended California law to calculate overtime consistent with the FLSA regulations, the DLSE Manual cannot trump the IWC, and that the Manual cites to a number of FLSA regulations in explaining the calculation of the regular rate.  As such, it’s hardly clear that the Manual’s provision regarding fixed bonuses was either correct under California law or clear enough to justify retroactive application of this case to unsuspecting businesses.

Have another nice day. 

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