Court Clarifies Regular Rate Calculation for Percentage of Earnings Bonus


Court Clarifies Regular Rate Calculation for Percentage of Earnings Bonus

The law is settled that overtime is calculated based on an employee’s “regular rate” of pay under both California and federal law. Similarly, California requires meal and rest break premiums for missed or non-compliant breaks to be paid at the employee’s regular rate. However, there continues to be significant litigation over how the regular rate is calculated. This is particularly true with non-discretionary bonuses that are earned over multiple pay periods, such as monthly or quarterly bonuses.

For most non-discretionary bonuses, employers must “true up” the additional overtime that is owed on the bonus for overtime hours worked during the bonus period. For example, if a bonus is earned over a calendar month, the additional overtime is calculated as follows: Step 1: Divide the total bonus amount by all hours worked during the month to determine the “bonus rate”; Step 2: Divide the bonus rate by 2 to calculate the half-time premium; Step 3: Multiply the half-time premium by the total number of overtime hours worked during the month.

In Alvarado v. Dart Container Corp. of California (2018) 4 Cal.5th 542, the California Supreme Court established a different formula must be used to calculate the overtime owed on a flat sum extra shift bonus. To calculate the overtime owed on such bonuses, employers can only divide the bonus amount by the total straight time (i.e., non-overtime) hours to determine the bonus rate. One and one-half times the full bonus rate is then multiplied by the total number of overtime hours instead of only the half-time premium. As a result, the overtime owed on a flat sum extra shift bonus is higher than what would be owed using the formula applicable to other types of bonuses.

In the recent case of Lemm v. Ecolab, Inc. (1/3/23, Case No. B31232), the California Court of Appeal clarified how overtime is calculated on a bonus that is based on a percentage of the employee’s total wages during the bonus period. In Lemm, the plaintiff was a non-exempt sales manager. He was paid hourly wages plus a monthly bonus if he met certain sales targets. The bonus equaled 22.5 % (or higher) of the total wages earned by the employee during the monthly bonus period, including the premium overtime wages paid on the employee’s base hourly rate. Because the bonus was based on the employee’s total earnings including overtime, the employer did not separately calculate the overtime “true-up” on the bonus. Although this method is expressly allowed under federal FLSA regulations (29 CFR 778.210), the plaintiff argued it did not comply with California law which is more favorable to employees. Instead, the plaintiff asserted that California law required the employer to separately calculate the additional overtime earned on the bonus using the formula described above.

The trial court ruled in favor of the employer, and granted Ecolab’s summary adjudication motion. Because Ecolab included the employee’s overtime earnings in the percentage of total wages used for calculating the bonus, the trial court followed the federal method and held no additional overtime was owed on the bonus. On appeal, the Court of Appeal (Second DCA) affirmed the trial court ruling in favor of Ecolab. The Court of Appeal agreed that the plaintiff’s method would require employers to pay double pay overtime on the bonus because the bonus formula already included a percentage of the employee’s overtime earnings.

Although the holding in Lemm is consistent with federal law, it is the first reported California case that has considered the regular rate calculation under California law on a percentage of earnings bonus. Lemm provides much needed guidance for the trial courts and the parties in regular rate cases.

Jeff Fuchsman