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California Supreme Court Punts on Whether Regular Rate is Calculated Per Pay Period or Workweek

by D. Gregory Valenza | | April 27, 2018

As discussed here, and here, the California Supreme Court held in Alvarado v. Dart Container Corp. of Cal. (original opinion here) that a flat-sum bonus for attendance on certain days is included in the regular rate of pay, and that regular rate is calculated by dividing the value of the bonus by the straight time hours worked in a pay period.  

I noted in a follow-up post that this language was probably incorrect, because the regular rate normally must be calculated by work week under federal law, and the California Division of Labor Standards Enforcement appears to agree.  “Pay periods” are typically semi-monthly or bi-weekly and, therefore, include two work weeks (bi-weekly) or more (semi-monthly).  Work weeks are 7-day periods. A regular rate calculated based on each work week may be higher or lower than one based on a pay period, depending on the rates in each workweek, the overtime hours worked, etc. Yes, this issue is very boring. But it also is very important. 

I also expressed hope that the parties were seeking modification or rehearing of the opinion.  Turns out the parties didn’t file any such petition or request. (!) But a couple of associations filed a request with the Court to modify or clarify the opinion.  After all, the Court’s opinion might be read to require calculating the regular rate based on a pay period, rather than a work week. Or the Court could have used “pay period” to mean “work week” in a colloquial sense.  Or, this was just a case of “imprecise” briefing and/or opinion writing.

Well, guess what?  The Court issued a modification to the opinion.  Guess what else?  It makes the whole situation even less clear than it was before. Here is the Court’s modification:

The opinion in this matter filed on March 5, 2018, and appearing in the California Official Reports at 4 Cal.5th 542, is modified as follows:

1.  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 not 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 mine. 

The Court is saying that its decision is based on the parties’ use of “pay period” as the basis for calculating overtime. That means the Court’s rationale is based on a formula that might or might not be flawed (but probably is).  And it also means the Court apparently doesn’t care about which term applies, because it would have reached the same result anyway.  

Sorry, California Supreme Court, you are way better than this. And I say this with peace and love. The justices can’t be expected to know every nuance of every area of the law.  The Court counts on its staff, the parties, and amici to provide the relevant law, accurately. The system apparently did not work well in this case. The Court should have withdrawn the opinion, obtained clarification for the law, and re-issued the opinion using the correct term. And yes, that’s just my opinion, man. 

What’s more, the Court in its modification does not recognize that the work week normally is the proper method of calculating the regular rate, even though the parties used the term “pay period” in the case at bar.  Rather, the Court leaves that question open.  This is not an employee or employer friendly issue. The regular rate could come out higher in either calculation.  The problem here is that the employer is entitled to know whether the proper calculation is work week or pay period, so it can calculate overtime correctly and avoid lawsuits.

What lawsuits? Well employees in theory may now bring claims for unpaid overtime based on alleged mis-calculation of the regular rate if the employer uses the work week to calculate the regular rate, but a pay period-based calculation would result in more overtime. And vice versa.  And if a work week-based calculation leads to a higher regular rate, but the employer used a pay period, then employees will have a claim based on federal law to boot.  That is because federal law decidedly bases the regular rate calculation on the work week.

In a future case, a court may affirmatively rule whether the work week or pay period is the proper method of calculating overtime.  But who knows when that will happen?  One hopes that the Division of Labor Standards Enforcement will issue a proper regulation, or that the Legislature will clarify this issue pronto.  And in that case, the DLSE or Legislature should choose the work week.  Why? Because if California law is that the regular rate is calculated based on a pay period, then every time California employers or payroll companies calculate paychecks, they will have to calculate whether the work week or pay period results in higher overtime, to avoid the aforementioned federal law issue.  

What a mess.  What do employers do now? Get advice from someone who knows what s/he’s talking about. Don’t base decisions that can have serious consequences on blogs that are not intended to be legal advice, ya hear?


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