California: Overtime Calculations on Percentage-Based Nondiscretionary Bonuses Revised

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APPLIES TO

All Employers with CA Employees

EFFECTIVE

January 5, 2023

  

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Key Takeaways

  • California employers may use the FLSA’s method of calculating overtime on percentage-based nondiscretionary bonuses that include overtime in the percentage calculation.
  • Employers must still use California’s DLSE Manual’s calculation for flat sum nondiscretionary bonuses.

Discussion

In Lemm v. Ecolab, Inc., the California Court of Appeal for the Second Appellate District said an employer can calculate overtime on a nondiscretionary bonus using the Fair Labor Standard Act’s (FLSA) calculation method. Although the calculation resulted in less pay than the calculation method set out in the California Division of Labor Standards Enforcement (DLSE) Manual, the employer acted appropriately. Here, the employee sued Ecolab claiming the overtime calculation on a nondiscretionary bonus was inaccurate. The bonus payments, which included a percentage multiplier for exceeding eligibility targets, were comprised of regular and overtime wages. This methodology is expressly provided for in the FLSA. The employee argued the calculation set out in the DLSE Manual should be used rather than the FLSA calculation because it resulted in higher pay and is the most favorable to California employees.

Ecolab argued using the DLSE Manual’s calculation would result in the double counting of overtime while the FLSA calculation more accurately applied to percentage bonuses which are paid as a percentage of gross earnings that have already incorporated straight time, overtime, and double time wages. The Court agreed that the DLSE Manual’s guidance was based on flat sum bonuses and not percentage bonuses. It would not make sense to pay overtime on a percentage bonus that already includes overtime pay. The Court also found that while courts must adopt the most favorable interpretation of the law that favors employees, it did not require courts to give employees “overtime on overtime.” Employers calculating overtime on nondiscretionary bonuses that do not fall into the type of calculation in the DLSE Manual’s guidance have some breathing room under federal law.

Action Items

  1. Review the FLSA calculation here and the DLSE calculation here.
  2. Review overtime calculations on nondiscretionary bonuses for compliance.
  3. Have appropriate personnel trained on calculating nondiscretionary bonuses based on percentage of gross earnings.
  4. Subscribers can call our HR On-Call Hotline at (888) 378-2456 for further assistance.

Disclaimer: This document is designed to provide general information and guidance concerning employment-related issues. It is presented with the understanding that ManagEase is not engaged in rendering any legal opinions. If a legal opinion is needed, please contact the services of your own legal adviser. © 2023 ManagEase