Calculating "Bonus Overtime" -- Marin v. Costco

It is shocking how many employers don't realize that paying a bonus to hourly employees will trigger an additional overtime obligation.  The decision in Marin v. Costco is a reminder of this obligation and an illustration of just how convoluted the calculation can become, especially where the bonus is variable based on work effort or performance.

The Marin decision involves a lengthy, eye-glazing mathematical analysis of a particularl bonus scheme that was arguably a hybrid between a "flat rate" and "performance-based" payment.  The main take-away points, however, are that:

  • Additional overtime payments are triggered when a bonus is paid; and
  • The method for calculating the amount of this "bonus overtime" depends on whether the bonus is characterized as a "flat rate" bonus or a "production" bonus. 

These concepts are outlined below in a somewhat simplified form.    

The Concept of "Bonus Overtime" -- Bonuses Retroactively Increase Employees' "Regular Rate"

"Bonus overtime" stems from the fact that overtime premium pay is computed based on a multiple (usually 1.5x) of the employee's "regular rate" of hourly compensation.  The regular rate is calculated by dividing the hours worked in a week by all compensation earned for that week.  But if the employee is later given a bonus that is partly due to the work performed in that week this additional pay must be added into the total compensation for the week (i.e., the denominator of the regular rate calculation).  This retroactively increases the employee's regular rate of pay.  

For example, suppose an employee's straight time hourly pay is $10/hr and he works 40 regular hours and ten overtime hours in a given week.  His regular weekly paycheck would include $400 of straight time pay ($10 x 40 hours) plus an additional $150 of overtime pay (1.5x his base rate, or $15/hr,  times 10 hours). 

The Retroactive Effect of A "Flat Rate" Bonus on Overtime.

Now suppose the employer has a generous annual profit-sharing program that pays this employee $5,200 at the end of the year based on the company's overall performance.  Because the bonus is equally attributable to all weeks in the year, this payment retroactively increases his weekly compensation by $100 (i.e., $5,200 divided by 52 weeks). 

Under California law, this additional $100 per week payment also retroactively raises the employee's regular hourly rate for the week by a full $2.50 (i.e., $100 divided by 40 straight time hours).   

Since his recalculated regular rate for the week is now $12.50 per hour, his recalculated overtime rate increases proportionately from $15/hr. to $18.75/hr.  Our hypothetical employee is therefore entitled to an additional $3.75 for each overtime hour worked, totaling $37.50 for the week. 

The Retroactive Effect of a "Production Bonus" on Overtime.

Now this time suppose the employer paid the same $100 per week amount as a performance bonus based on the employee's individual volume of production during the year -- making sales, manufacturing widgets, etc.   In this case, California law  calculates bonus overtime differently.  Instead of dividing the $100 by 40 straight time hours to determine the "regular rate" for bonus overtime, the employer is allowed to divide the amount by all 50 hours worked (i.e., both straight time and overtime hours worked).  

As a result, the employee's regular rate for the week rises by just $2.00 (i.e., $100 divided by 50 total hours worked), and the hypothetical employee is entitled to only an additional $20 in bonus overtime for the week ($2.00 x 10 hours). 

The idea behind this different calculation is that  the extra production generated by working overtime hours helped contribute to achieving the "production" bonus in the first place.  Thus, not counting the overtime hours in the "regular rate" would amount to a partial double recovery.     

The Bottom Line: Calculating bonus overtime is a complex headache for employers.  However, they ignore it at their peril because the use of a mistaken formula is an ideal subject for a class action with the potential for huge liability.          

Court Rejects Punitive Damages for Labor Code Violations -- Brewer v. Premier Golf Properties

California Civil Code section 3294 provides that punitive damages are generally available in any "action for the breach of an obligation not arising from contract."  So if the Legislature creates a statutory obligation and does not specifically limit the remedies, shouldn't a plaintiff be able to recover punitive damages if he proves the defendants acted with the requisite "malice, fraud or oppression?"

This question has been the subject of many demurrers over the years but has never had a very clear answer.  In the context of state statutes prohibiting employment discrimination courts long ago held that punitive damages should be available even though they were not specifically authorized by the statutes themselves.  Courts have been more reluctant, however, in the context of Labor Code violations.

Brewer v. Premiere Golf Properties is the first published appellate opinion to directly address the issue.  The decision rejected the recovery of punitive damages for Labor Code violations -- or at least for an employer's violation of its obligation to pay minimum wage and provide meal periods.   

The Court's first rationale for rejecting punitive damages was to invoke the so-called "new right-exclusive remedy" doctrine.  Under this theory, the Legislature is presumed to deny punitive damages as a remedy for any new statutory right except where there is already a pre-existing "common law analog" for the new right.  

Next, the Court opined that punitive damages should also be unavailable because "claims for unpaid wages and unprovided meal/rest breaks arise from rights based on [the plaintiff's] employment contract."  

Neither rationale seems compelling.  In particular, the Court's attempt to distinguish the cases allowing punitive damages for employment discrimination is less than convincing.  After all, there was no common law cause of action for racial, gender, age or disability discrimination.  And a claim for unequal wages due to discrimination could just as easily be described as "arising from" the underlying employment relationship.  In either case, employees cannot contract out of their statutory rights.    

The opinion is a welcome development for employers, who face enough liability from class action wage and hour claims already.  But the Court reaches its result through some pretty suspect reasoning.  And for that reason (as well as the importance of the issue), the case seems like a prime candidate for Supreme Court review.  


Some Background On New Labor Secretary - Hilda Solis

Hilda Solis has been tapped to be Barack Obama's Secretary of labor.  As reports:

Solis, 51, is a four-term member of Congress with an extensive record on environmental issues. Her legislative accomplishments include spearheading a bill to provide workers with training for “green-collar” employment. Such initiatives are a hallmark of Obama’s plan to address the country’s energy needs and create new jobs.

Obama has promised to press an ambitious labor agenda to strengthen unions, protect jobs and bolster the middle class. The president-elect is set to announce the Solis appointment tomorrow in Chicago, said the officials, who spoke on condition of anonymity. Solis, who grew up in a union household in Los Angeles County, is a favorite of labor groups, including the Service Employees International Union.

Solis has been a blogger for The Huffington Post.  For some insight into Solis' views, it is worth perusing a collection of her posts for The Huffington Post

She also sets out here labor ties in this speech:


Mass Layoffs Trigger Federal And California Law Notice Requirements

As this story about a recent restaurant closure illustrates, California employers who are downsizing in this dismal economy must comply with the federal WARN Act, and California’s “baby” WARN Act equivalent.

Most employers are aware that the federal WARN Act requires that employees must be given at least 60-days’ advance notice of certain large-scale layoffs. Many employers do not recognize that California’s separate state statute that also requires 60-day advance notice to employees, but also includes a substantially different definition of the types of layoffs that will trigger the notice requirement. For example, under California law, notice is normally required whenever 50 employees are terminated in 30 days from any facility that has employed 75 or more workers within the last 12 months. However, federal law applies when (1) a reduction in force of at least one-third of the full-time employees, provided the number of full-time affected employees is at least 50, at a single facility during any 30-day period; or (2) employment loss of at least 500 full-time employees at a single facility during any 30-day period, regardless of the percentage affected.

The penalties for non-compliance under California’s so-called “baby” WARN Act are much harsher than those under federal law.


Class Action Lawsuit Against Heller Ehrman Alleges Failure to Pay Accrued Vacation

As many readers have no doubt heard the venerable law firm of Heller Ehrman recently dissolved after nearly one hundred years in business.  During this time it was intermittently the biggest firm in the Bay Area and close to the top in the state.

One unfortunate aspect of the dissolution is that the Firm apparently made a strategic decision not to pay accrued vacation to its terminated California employees.   Under California law (Labor Code section 227.3) such accrued payments are deemed to be earned wages which are property of the employee every bit as much as regular salary. As a result, a class action lawsuit has been filed by former Heller Ehrman employees to recover these and other amounts allegedly due at termination. 

The lawsuit is interesting on a number of levels.  It is a reminder to employers that California vacation wages are an accrued liability that must be taken into account.  

It is also a sad commentary on modern Big Firm economics.  A law firm, no matter how large, is essentially a collection of individuals working together.  The assets of the firm "leave the building every night" as the saying goes.  And if they don't return the next morning, there is really nothing left for creditors, including employees.  Clearly the plaintiffs challenge will not be establishing liability but satisfying any judgment from a defunct partnership. 



Bad Economy Forces Politicians To Re-Think California's Meal Break and Overtime Laws

The bad economy is forcing politicians and business owners to re-examine California's laws on meal and rest breaks, and overtime.  The Governor has proposed legislation to reform these laws in order to keep jobs and businesses here in California.  As the Los Angeles Times reports today these issues are becoming "bargaining chips" in the state budget crisis.  The article notes:

Consider the state rules on work breaks. They are intended to make sure that employers don't force hourly workers to work for long periods without a break. Current law requires that mandatory, unpaid, half-hour lunch breaks be given before the end of the sixth consecutive hour on the job.

Employers say they want to modify the overly rigid law to give them and employees needed flexibility to set schedules. They say they want to make it possible for staff members to eat a sandwich at their desks voluntarily or to keep waiting tables -- and earning tips -- during a busy time at a restaurant. Additionally, working through a lunch break could give employees the option of going home early, employers contend.

The article continues:

As for overtime, California law calls for time-and-one-half pay for hourly workers after they clock eight hours in a single day. Additionally, in California and other states, extra pay accrues on a weekly basis after a worker puts in 40 hours.

Employers say the law makes it more expensive and difficult for managers to let an employee juggle his or her schedule to take care of personal or family needs, business lobbyists say.

My prediction is that these regulations are not likely to change anytime soon.  However, history has proven that these items are politically charged.  The eight-hour work day was done away with in 1997 when California’s Industrial Welfare Commission overturned state regulations for overtime pay after eight hours worked in one day.  This change did not last long, and the eight-hour work day was reinstated in 1999 by Governor Grey Davis. 

Bad Records Are No Defense to Class Certification -- Harper v. 24 Hour Fitness

In opposing class certification employers frequently argue that identifying the class members will be prohibitively expensive or time consuming due to lack of records.  For example, it may be difficult to determine who was affected by certain commission terms, who worked overtime, or who did or did not take a full 30 minute meal break  on particular days.

In the recent case of Harper v. 24 Hour Fitness, the Second District Court of Appeal emphasized that difficulty in ascertaining class members is no defense where the problems stem from deficiencies in the employer's own recordkeeping.  

Harper involved a claim that 24 Hour's standard membership agrement violated certain consumer laws and was unconscionable.  The Defendant argued that many members had handwritten modifications to their form contracts and that it would be extremely difficult to determine who had such modifications and whther the changes should exclude them from the class.  The trial court found this persuasive and relied on this argument, in part, in deciding to decertify the class.  The Appellate Court reversed, however, found that this analysis was error.  The reviewing court noted in the process that a defendant "may not avoid class certification by comingl[ing] or fail[ing] to document" particular transactions.

Few businesses deliberately keep bad records to avoid a "paper trail" of potential misconduct.  But for those who might consider this a valid strategy, Harper v. 24 Hour Fitness serves as caveat that this may not be an effective strategy, at least not in the class action arena.             

California Employment Applications Must Exclude Certain Marijuana Convictions -- Starbucks v. Superior Court (Lords)

An obscure provision of California law, Labor Code section 432.8, prohibits employers from asking job applicants about marijuana-related convictions which are more than two years old.  Most standard employment applications include a general question asking for disclosure of all criminal convictions.  As a practical matter California applications must therefore include a special disclaimer to inform applicants that  these marijuana convictions are excluded from the generic disclosure request.  

In Starbucks v. Orange County Superior Court, the Fourth District Court of Appeal recently clarified two questions: (1) how employers should physically design their applications to comply with the statute; and (2) which applicants will have standing to sue if the application is defective.

 As to the first issue, Starbucks used a standard nationwide application form which actually did contain the special California disclaimer language under a heading "For California Applicants Only."  The problem, however, was that this disclaimer appeared only on the back of the form alongside unrelated boilerplate disclaimers for Massachusetts and Maryland applicants.  

The Court explained that "Had Starbucks included the California disclaimer immediately following the conviction questions, Starbucks would have been entitled to summary judgment in its favor on the reasonableness of the employment application."  But placing the language on the back of the page in a nationwide "one-size-fits-all style" was not sufficiently clear to meet the standard of "clarity for which California law strives." 

Luckily for Starbucks it was entitled to summary judgment on other grounds.  For one thing, the class representatives had never themselves been convicted of anything.  As a result, they had no right to sue under a statute which was designed to protect reformed stoners rather than law abiding citizens with nothing to hide.  If the Court had gone the other way on this standing-to-sue issue Starbucks could have faced $26 million in fines for all persons who ever filled out an application.     

This is an instructive holding which will undoubtedly be cited as authority in cases testing the sufficiency of all manner of disclaimers contained in form documents.  The lesson for employers and other business is that they must consider the physical layout of their standardized forms as well as the actual language used in the form.      



IRS Lowers Mileage Rate For 2009

The IRS announced that it will be lowering the IRS mileage rate in 2009.  Beginning on Jan. 1, 2009, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be 55 cents per mile for business miles driven. This is a change from 50.5 cents in the first half of 2008 and 58.5 cents in the second half.

California employers need to reimburse employees for miles driven for business purposes under Labor Code section 2802.  The California Supreme Court clearified some of the rules pertaining to expense reimbursement last year in Gattuso v. Harte-Hanks (click here for more analysis of the case).  The Court also held that the mileage reimbursement rate can be negotiated by parties as long as it fully reimburses the employee, and the amount does not necessarily have to be the IRS mileage rate, which is contrary to the DLSE’s opinion on the issue.