Reversing a judgment in favor of a class of employees, the California Court of Appeal has ruled that an employer's formula for calculating overtime compensation on bonuses paid to hourly employees did not violate the California Labor Code or the federal Fair Labor Standards Act. Marin v. Costco Wholesale Corp., No. A116847 (Cal. Ct. App. Dec. 23, 2008). Rejecting the trial court's conclusion that the employer should have adopted a different bonus formula, the court directed the trial court to enter judgment for the employer.
The Costco decision for the first time addresses an issue that has bedeviled California employers: What is the correct method under California law for computing overtime payments due on a bonus? No prior California court decision addressed this point. The State Labor Commissioner's Enforcement Policies and Interpretations Manual ("DLSE Manual") has expressed the Division's enforcement interpretation, but cited no authority — a fact that led the Costco court to rule the affected portions of the DLSE Manual effectively constituted regulations that had not been properly adopted under the State's Administrative Procedure Act, Gov't Code §11340 ff.
The Employer's Bonus Program
The employer had a bonus program for long-term hourly employees. To be eligible for the bonus, paid in April and October, employees had to: (1) have been paid a specified number of hours for continuous service — 8,000 hours (approximately four years) for those hired before March 15, 2004, and 9,200 hours (approximately 4.6 years) for those hired after that date; (2) in general, be at the top of their pay scale; and (3) have been employed by the company on April 1 for the April bonus and October 1 for the October bonus. The maximum semi-annual base bonus amount was $2,000 for those with less than 10 years of service, $2,500 for those with 10 to 14 years of service, $3,000 for those with 15 to 19 years of service, and $3,500 for those with 20 or more years of service.
To qualify for the maximum base bonus, the employee must have been paid for at least 1,000 hours in the six-month period preceding April 1 and October 1. Bonuses were prorated for those paid for fewer than 1,000 hours. The formula for the base bonus was: hours paid up to 1,000 divided by 1,000 multiplied by the maximum bonus amount. The employer calculated the overtime owed on the bonus by dividing the employee's maximum base bonus by the minimum number of paid hours required to achieve that maximum bonus (1,000) to determine a regular hourly bonus rate, and then by multiplying the number of overtime hours worked during the bonus period by one-half of that regular bonus rate.
The named plaintiff, Anthony Marin, sued the employer on behalf of himself and others, alleging that the employer's calculation of overtime pay on his bonus violated the California Labor Code and the FLSA. The plaintiff argued that the employer was required to calculate the bonus rate by dividing the base bonus the employee earned by the number of straight time hours worked during the bonus period, and then by multiplying the number of overtime hours by 1.5 times the bonus rate. The trial court agreed, in part, with the plaintiff, finding that the bonus plan failed to comply with California law for employees who worked more than 1,000 hours in a bonus period. It ordered the employer to pay bonus overtime in accordance with the plaintiff's formula. In so ruling, the trial court relied on Skyline Homes, Inc v. Dep't of Indus. Relations, 165 Cal. App. 3d 239 (Cal. Ct. App. 1985), and sections of the Division of Labor Standards Enforcement's 2002 Enforcement Policies and Interpretations Manual, distinguishing "flat sum" bonuses (Manual §49.2.4.2) from bonuses "based on a percentage of production or some formula other than a flat amount" (Manual §49.2.4). The employer appealed, and the appeal court reversed.
The Court of Appeal's Ruling
First, the appellate court found that Skyline did not apply because that case had nothing to do with the payment of overtime on bonuses. Rather, it addressed the method for computing overtime owed to employees who were guaranteed a fixed minimum salary, worked variable hours, and were being paid overtime compensation under the federal fluctuating workweek method (the Skyline decision ruled California law did not permit the fluctuating workweek method because of this State's daily overtime requirements). Skyline addressed an overtime formula that encouraged the imposition of overtime because each overtime hour worked reduced the regular rate of pay and with it the cost of overtime hours to the employer. By contrast, in the Costco case, the employer's bonus plan did not encourage overtime work because the regular rate attributable to the bonus remained constant under the plan, regardless of the number of hours worked — thereby making additional overtime hours more expensive to the employer. Second, the court found that the provisions of the DLSE Manual regarding the calculation of overtime on flat rate bonuses relied on by the trial court did not have the force of law. The DLSE Manual did not support the examples of bonus calculations with references to statutes, cases, opinion letters or administrative decisions. Rather, the DLSE Manual based its overtime calculations, including the 1.5 multiplier urged by the plaintiffs, on unspecified "public policy" to prevent the encouragement of overtime. In the absence of supporting authority, the Costco court found these provisions of the DLSE Manual were void as "underground" regulations, that is, regulations that were improperly issued.
Even if the DLSE Manual provisions were lawful, they did not apply to the employer's bonus plan. The two provisions addressed flat sum bonuses and production bonuses. The employer's plan had elements of both types of plans. The plan functioned as a "production" bonus up to the 1,000-hour threshold for the maximum base, but it was paid at "the end of the season" like a flat sum bonus. Notwithstanding the flat sum bonus component of the plan, the plan did not encourage the imposition of overtime. Thus, the court saw "no justification" for using the premium multiplier of 1.5, rather than defendant's multiplier of .5, to calculate the bonus overtime. In essence, the plaintiffs wanted the overtime to be calculated by dividing the bonus by the straight time worked, and multiplying the resulting figure by 1.5. But since the company already would have paid the employees straight time, multiplying the hourly rate by 1.5 would have been tantamount to double counting. Finally, the court found that nothing in the federal regulations regarding calculation of overtime on bonuses (set forth in 29 C.F.R. §778.209(b)) prohibited the employer's method of calculating bonus overtime. This case provides useful guidance to employers regarding the payment of overtime on bonuses. The employer in the case needed only to pay an additional .5 times the bonus to cover the overtime premium on the bonus, rather than 1.5 times the bonus rate, because the employer already had paid straight time for the hours worked. When structuring bonus programs, employers should consult with counsel to ensure compliance with applicable state and federal wage and hour laws.
© 2009 Jackson Lewis LLP. Reprinted with permission.
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