California Appellate Court Holds That Percentage Bonuses Can Be Calculated Using FLSA Method
In a pro-employer decision addressing the overlap of federal and California wage and hour law, the California Court of Appeal for the Second Appellate District upheld summary adjudication for the employer, finding that the employer’s calculation of overtime on a nondiscretionary bonus using the Fair Labor Standards Act’s (“FLSA”) calculation method set forth in 29 C.F.R. section 778.210 (“CFR 778.210”) was permissible, even though it resulted in less pay than the calculation method set forth in the California Division of Labor Standards Enforcement (“DLSE”) Manual.
In Lemm v. Ecolab, Inc. [callaborlaw.com], the plaintiff sued his employer, Ecolab, under the California Private Attorneys General Act (“PAGA”), claiming that Ecolab improperly calculated the overtime due on a nondiscretionary bonus paid to him and all other similarly situated employees. The parties stipulated to have the trial court determine the overtime calculation issue based on cross-motions for summary adjudication.
In this case, the plaintiff was employed as a nonexempt route sales manager who regularly worked more than 12 hours in a day and more than 40 hours in a week. He was paid hourly wages, including any applicable overtime and double-time wages, every two weeks. He was also eligible to receive a nondiscretionary, monthly bonus, which would be paid every four to six weeks. Eligibility for the bonus was governed by an Incentive Compensation Plan (the “Plan”). Under the Plan’s terms, eligibility for the bonus depended on meeting or exceeding certain targets. If eligible, the Plan provided for a bonus payment in the amount of 22.5 percent of the worker’s gross wages earned during the monthly bonus period. The percentage multiplier used to calculate the bonus amount could increase for workers who exceeded the eligibility targets (i.e., greater sales meant a percentage multiplier).
As a result, the bonus payments, as a percentage of gross wages earned comprised of regular and overtime wages, necessarily included additional overtime compensation. That methodology is expressly provided for under federal law, specifically, CFR 778.210. (Sample calculations are provided in the Court of Appeal decision.)
In the summary adjudication motions, the plaintiff argued that under California law, nondiscretionary bonus payments must be incorporated into the regular rate of pay, which in turn would affect overtime calculations. The plaintiff argued that the formula set forth in section 49.2.4 of the DLSE Manual should be used instead of the calculation permitted in CFR 778.210 because the DLSE Manual’s method resulted in higher pay, and thus, as stated by the California Supreme Court in Alvarado v. Dart Container Corp. of California (2018) 4 Cal.5th 542, the court must use the formula more favorable to California employees.
Ecolab argued that CFR 778.210 was the proper method of calculating the overtime due on the monthly bonus because that section applied to bonuses that are known as percentage bonuses, which are paid as a percentage of gross earnings that have already incorporated straight time, overtime, and double time wages for each bonus period. Thus, Ecolab argued, if the plaintiff’s method of calculation were to be used, it would result in the double counting of overtime, or “overtime on overtime.”
The trial court granted Ecolab’s summary adjudication motion and denied the plaintiff’s motion, finding that Alvarado’s holding was limited to flat sum attendance bonuses, not percentage bonuses like the one at issue in this case. (The bonus at issue in Alvarado was a pre-determined, flat sum, attendance bonus, which is significantly different than the variable, percentage of wages production bonus at issue here.) Thus, using the calculation permitted by CFR 778.210, in this case, was not at odds with the rationale of Alvarado or the DLSE Manual’s guidance on calculating flat sum bonuses. The trial court stated, “Ultimately, [Ecolab’s] position makes logical sense. Simply 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.’ This is not a requirement under the law. By paying a bonus based on a percentage of gross earnings that includes overtime payments the employer automatically pays overtime simultaneously on the bonus amount.”
The Court of Appeal agreed. While recognizing that overtime compensation in California was governed by both federal and state law and that federal law did not preempt state law in this area, the Court stated that federal cases may provide persuasive guidance because California wage and hour laws were modeled to some extent on federal law. Similar to this case, courts in the Ninth Circuit and California District Courts had previously upheld using the percentage of bonus calculation set forth in CFR 778.210 under federal and California law.
The Court of Appeal also recognized the principle stated in Alvarado that while the DLSE Manual could be considered as a compilation of the DLSE’s expertise and competence, a court could adopt the DLSE Manual’s interpretation only if the court, through its exercise of independent judgment, determined that the DLSE Manual’s interpretation was correct based on the facts at issue in the particular case. The Court then determined that the calculation used in Alvarado and the DLSE Manual dealt with how to calculate an employee’s overtime pay rate when the employee has earned a flat sum bonus during a single pay period, not the type of percentage bonus at issue in this case.
The Court of Appeal recognized that Ecolab demonstrated that the plaintiff and alleged aggrieved persons would have been paid the same amount regardless of whether Ecolab used the DLSE Manual formula as applied to percentage bonuses or the CFR 778.210 formula, so long as the calculation first eliminated overtime on overtime. The Court determined that while as a general rule, courts must adopt the construction that favors the protection of employees, that general rule did not require courts to interpret state law to give an employee “overtime on overtime,” when such an interpretation would be inconsistent with the fundamental principles of overtime and would result in a windfall to employees. This Court of Appeal decision emphasizes that California employers need not always follow the DLSE Manual’s guidance on calculating overtime on nondiscretionary bonuses if the guidance does not address the type of bonus at issue and does not make sense under the circumstances.
California Agency Issues New Guidance Stating Employers May Not Require Employees to Remain On-Site During Rest Breaks
California’s Division of Labor Standards Enforcement (DLSE) recently updated its guidance on paid 10-minute rest breaks. In its new guidance the DLSE maintains, for the first time, that an employer may not require its employees to remain on the employer’s premises during rest breaks.
In November 2017 the DLSE posted on its website new Frequently Asked Questions (FAQs) addressing requirements for rest breaks and lactation accommodation. That new guidance includes the following:
5. Q. Can my employer require that I stay on the work premises during my rest period?
A: No, your employer cannot impose any restraints not inherent in the rest period requirement itself. In Augustus v. ABM Security Services, Inc., (2016) 5 [sic] Cal.5th 257, 269, the California Supreme Court held that the rest period requirement “obligates employers to permit—and authorizes employees to take—off-duty rest periods. That is, during rest periods employers must relieve employees of all duties and relinquish control over how employees spend their time.” (citation omitted) As a practical matter, however, if an employee is provided a ten minute rest period, the employee can only travel five minutes from a work post before heading back to return in time.
The new DLSE FAQs in their entirety can be found here. In the Augustus v. ABM Security Services case cited by the DLSE, the California Supreme Court held that employees cannot be required to remain on-call during rest breaks, but did not expressly say employers must allow their employees to leave the employer’s premises during rest breaks. For more information on the Augustus case see our December 27, 2016 blog post.
Prior to the DLSE’s new FAQs, it was widely understood that employers may require their employees to remain on-site during rest breaks. While the DLSE has no authority to make law, it is empowered to enforce California wage orders and labor statutes, and courts often find the DLSE’s opinions on enforcement issues persuasive. For this reason California employers should take the DLSE’s new guidance seriously.
As the DLSE pointed out in its new FAQs, the realities of time and distance are likely to discourage many employees from leaving their employer’s premises during 10-minute rest breaks, even when allowed to do so. However, an employer’s policy that purports to prohibit employees from leaving the employer’s premises during rest breaks could, under the DLSE’s new interpretation, potentially support a conclusion that the employer failed to relieve its employees of all duty during rest breaks, and subject the employer to liability. California employers should therefore review their policies and practices to ensure they are not requiring employees to remain on the employer’s premises during rest breaks.
California Issues Revised Notice Template and Additional FAQs for Wage Theft Prevention Act
The California Division of Labor Standards Enforcement (DLSE) has issued a revised notice template and additional Frequently Asked Questions (FAQs) to assist employers in complying with the state’s Wage Theft Prevention Act employee notice requirements. The revised template and the new FAQs, which are effective April 12, 2012, can be downloaded here.
The Wage Theft Prevention Act of 2011 requires California private-sector employers to provide each newly hired, non-exempt employee with a written notice that contains specified information. See our previous posts of October 20, 2011 and February 7, 2012 for a detailed discussion of the notice requirements.
Most of the changes reflected on the new template appear to be fairly minor, but there are at least three substantive changes/clarifications that deserve mention:
First, the new template clarifies that when a staffing agency hires an employee, it is the staffing agency, and not the staffing agency’s client for whom the employee is assigned to perform work, that is responsible for issuing the notice to the employee.
Second, whereas the previous template inquired whether the “employment agreement” is written or oral, the new template simply inquires whether there is a written agreement regarding “the rate(s) of pay.” Apparently some employers were confused by the previous language, believing (wrongly) that acknowledging the existence of any agreement, oral or written, might make it difficult to defend the at-will status of the employee.
Third, the new template makes it clear that an employee’s signature in the “Acknowledgment of Receipt” portion of the notice is optional, and that if the employee does sign, the signature merely constitutes acknowledgment of receipt.
Fortunately, the new FAQ No. 27 provides that if an employer has already issued a notice to an employee using the old form, and there have been no substantive changes to the information contained on the old form, the employer need not issue a new notice until there is a substantive change to the previously-provided information.
California employers should make sure that the individuals in their organizations who exercise responsibility for preparing and issuing notices to new hires are aware of the revised template and the new FAQs. In addition, employers who have chosen to create their own notice forms (as opposed to using the template provided by the DLSE) should review their forms to make sure they are consistent with the DLSE’s new guidance.
Aaron Buckley – Paul, Plevin, Sullivan & Connaughton LLP – San Diego, CA
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