The California Supreme Court’s ruling this morning in Alvarado v. Dart Containers may have many employers scrambling to verify their overtime pay calculations. The Court rejected Dart’s complicated overtime calculations, which utilized a multiplier of 0.5 instead of 1.5, and which, in calculating the “regular rate” of pay to determine overtime pay, used a divisor of the total hours worked, including overtime. According to the Supreme Court, to account for overtime premium associated with a flat sum bonus, the correct calculation is the amount of the bonus divided by the regular hours worked by the employee, multiplied by 1.5.

Thus, to correctly calculate the total overtime compensation due to the employee, the calculation is as follows:

(overtime hours x regular rate x 1.5) + (bonus/regular hours worked x overtime hours worked x 1.5) = total overtime compensation

Importantly, this rule applies retroactively, exposing any company that incorrectly calculated overtime rates to statutory penalties, whether or not the mistake was made in good faith.