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.          

Trackbacks (0) Links to blogs that reference this article Trackback URL
http://www.vtzlawblog.com/admin/trackback/102779
Comments (1) Read through and enter the discussion with the form at the end
Paul M. Cashion - April 9, 2009 1:57 PM

Thanks, Brian, for an excellent illustration of a distinction that is lost on many employers. As a Texas-based HR practitioner with CA employees, I know I would likely forget the 40-hour basis for regular-rate overtime.

Post A Comment / Question Use this form to add a comment to this entry.







Remember personal info?