California employers received some good news and relief from complicated overtime calculations on percentage bonus payments. In the case of Lemm v. Ecolab, Inc., the court addressed how California employers must calculate overtime on certain nondiscretionary employee bonuses.
The California Court of Appeal ruled that Ecolab was permitted to use the more forgiving Federal Fair Labor Standards Act (“FLSA”) method for calculating overtime on bonuses instead of the more complicated and costly method set forth in the California Division of Labor Standards Enforcement (“DLSE”) Manual.
In this case, the Plaintiff/employee was a sales manager who regularly visited Ecolab’s customers to install, repair, and maintain Ecolab’s commercial sanitation equipment, as well as to sell products and parts and to offer training and customer service. Plaintiff filed a lawsuit under the Private Attorneys General Act (“PAGA”), claiming that Ecolab had miscalculated the overtime due on nondiscretionary bonuses paid to him and all other similarly situated employees.
As a sales manager, Plaintiff was eligible to receive a nondiscretionary monthly bonus, which was based on two components: sales and service. Both bonuses were figured as a percentage of Plaintiff’s earnings. As a non-exempt employee, Plaintiff was entitled to receive overtime pay on the bonus as well as on his ordinary wages.
Plaintiff argued that under California law, Ecolab was required to incorporate these nondiscretionary bonus payments into the “regular rate of pay” and then calculate the additional, bonus-adjusted overtime amount (often referred to as a “true-up” payment) according to the formula set forth in the DLSE Manual.
Ecolab argued that FLSA formula was the proper method for calculating overtime based on Plaintiff’s “percentage bonuses.” Because percentage bonuses are paid as a percentage of gross earnings that have already factored in all straight time, overtime, and double time wages for each bonus period, Ecolab argued, there was no need to perform a separate “true-up” calculation because any overtime and double time was automatically included in the bonus.
Both the trial court and appellate court agreed with Ecolab, with the trial court noting that Ecolab’s position made “logical sense” and that “[s]imply put, a requirement for an employer to pay overtime on a percentage bonus that already includes overtime pay makes the employer pay 'overtime on overtime.'” The Court of Appeal agreed, concluding that application of the DLSE formula would result in a “windfall” for employees and that California’s policy of adopting the law most favorable to employees does not “obligate courts to interpret state law to give an employee ‘overtime on overtime’ when such an interpretation would be inconsistent with the fundamental principal of overtime.”
This decision is a big win for employers who already use percentage bonuses to reward and incentivize their employees. Given that “true-up” calculations are administratively challenging and can often be complex, employers may want to consider moving away from flat sum bonuses and toward percentage bonuses to the extent that doing so aligns with their business objectives.
We will continue to monitor developments in the ever-shifting wage and hour compliance landscape both under California law and the FLSA for employers with nationwide workforces. In the meantime, if you have any questions about the matters discussed in this issue of Compliance Matters, please call your firm contact at 818-508-3700 or visit us online at www.brgslaw.com.