Bonus Effect On Overtime Wages

A recent decision from the First District Court of Appeal in San Francisco explains how bonus payments affect overtime wages. Marin v. Costco Wholesale Corp., Case No. A116847 (Cal. Ct. App. Dec. 23, 2008).

General Principles

Under the federal Fair Labor Standards Act and the California wage orders, employers must calculate overtime based on the "regular rate of pay." Although that is easy to do if the employee only earns a set hourly wage, employee compensation often includes other components. Some nonexempt employees are paid a salary. A paycheck may also include commissions, gifts, profit-sharing, bonuses and other items.

The regular rate must be computed workweek by workweek. For each workweek, total all compensation paid, but omit overtime payments, premium pay for work during off-hours, such as nights and holidays, gifts, profit-sharing and other benefit plans, and discretionary bonuses. These concepts are described in the U.S. Department of Labor's regulations at 29 C.F.R. sections 778.200 through 778.225. Divide the total by the number of hours actually worked (federal method) or the number of hours worked up to 40 (California method) to get the regular rate of pay.

Non-discretionary bonuses (those earned by by meeting performance standards, or based on formulas) are included in the regular rate calculation. (The distinction between discretionary and non-discretionary is described in 29 C.F.R. section 778.208.) But, such bonuses often cover more than one workweek. That requires an allocation of the bonus across the entire period, as explained in 20 C.F.R. section 778.209, and in section 49.2.4 of the California DLSE Enforcement Policies and Interpretations Manual.

The Marin Decision

Costco offered a formulaic bonus to its long-term hourly employees, which the Court of Appeal explained as follows: "To be eligible for the bonus, paid in April and October, these employees must: (1) have been paid a specified number of hours for continuous service—8,000 hours (approximately four years) for those hired before March 15, 2004, and 9,200 hours (approximately 4.6 years) for those hired after that date; (2) generally be at the top of their pay scale; and (3) have been employed by defendant on April 1 for the April bonus and October 1 for the October bonus. The maximum semi-annual base bonus amount is $2,000 for those with less than 10 years of service, $2,500 for those with 10 to 14 years of service, $3,000 for those with 15 to 19 years of service, and $3,500 for those with 20 or more years of service. To qualify for the maximum base bonus, the employee must have been paid for at least 1,000 hours in the six-month period preceding April 1 and October 1. Bonuses are prorated for those paid for less than 1,000 hours; the formula for the base bonus is thus: hours paid up to 1,000 ÷ 1,000 × maximum bonus amount."

Costco calculated the overtime attributable to the bonus by dividing the employee’s maximum base bonus by the minimum number of paid hours required to achieve that maximum bonus (1,000), and then by multiplying the number of overtime hours worked during the bonus period by one-half of that regular bonus rate. Attorneys for a class of Costco employees contended that Costco should have divided the base bonus the employee earned by the number of straight time hours worked during the bonus period, and then multiplied the number of overtime hours by 1.5 times that regular bonus rate. For an employee who earned a $2,500 bonus, the two methods could yield a difference of $350. The trial court adopted the plaintiffs' method with a modification, and entered judgment against Costco for $5.3 million.

The Court of Appeal reversed the judgment, and ruled that Costco had properly calculated the overtime due. The Court ruled that the DLSE manual did not have the force of law with respect to including bonuses in the regular rate of pay, because it had not been adopted as a regulation and did not cite any authority. Nonetheless, the Court also explained that Costco's method of calculating the regular rate of pay satisfied the standards set out in the manual.

Courts Can Discriminate, Too

The First District Court of Appeal in San Francisco has ruled that a Sonoma County Superior Court Commissioner may pursue an age discrimination claim against the Court over the Superior Court's claim of discretionary immunity under Government Code section 820.2. See DeJung v. Superior Court, Case No. A116911 (Dec. 19, 2008).

DeJung (age 64) alleged that the Executive Committee of the Superior Court judges refused to appoint him to a full time position because they preferred a younger candidate. Relying on the California Supreme Court's decision in Caldwell v. Montoya, 10 Cal.4th 972 (1995), the Superior Court argued that the decision to appoint a commissioner was a discretionary one immune from liability under section 820.2. The Court of Appeal explained that Caldwell only immunized individual government officials for their discretionary decisions. The Supreme Court had expressly declined to rule whether section 820.2 would provide immunity from a direct liability claim under the Fair Employment and Housing Act against a government entity, like the one alleged by DeJung. The Court of Appeal decided that it did not.

On the merits, DeJung provided evidence that the presiding judge had said twice that the judges wanted someone younger than DeJung. The Superior Court attempted to overcome that evidence by arguing that the decision was made by a committee, of which the presiding judge was just one member. The argument was punctured by the claws of the "cat's paw" doctrine, that is, as the Court explained, "showing that a significant participant in an employment decision exhibited discriminatory animus is enough to raise an inference that the employment decision itself was discriminatory."

[The phrase cat's paw is derived from a La Fontaine fable entitled The Monkey and the Cat, in which a monkey convinces a cat to pull chestnuts out of hot coals for him, and refers to using another (the cat's paw) to accomplish one's purposes.]

Is Boot Up Time Work Time?

Over the past several months there has been much ado about the status of time employees spend waiting for their computers to boot up. Class actions have been filed against Cigna Corp., AT&T and BellSouth, and United HealthGroup, in which employee lawyers allege that the employers have not been paying for time employees spend waiting for their computers to start up and shut down.

Although the press has labeled these a new type of lawsuit, they involve straightforward application of settled principles about the concept of hours worked. Under both the federal Department of Labor regulations and the California Division of Labor Standards Enforcement guidelines, time that employees spend waiting for something to happen after they get to work constitute hours worked, because the employee remains subject to the control of the employer. The time does not count toward hours worked only if there is a sufficient break in work for employees to devote time to their own pursuits. For the federal and state administrative interpretations see 29 CFR sec. 785.14 and section 46 of the DLSE Enforcement Policies and Interpretations Manual.

Section 785.15 of the federal regulations gives the following examples: "A stenographer who reads a book while waiting for dictation, a messenger who works a crossword puzzle while awaiting assignments, fireman who plays checkers while waiting for alarms and a factory worker who talks to his fellow employees while waiting for machinery to be repaired are all working during their periods of inactivity."

While it is impossible to state a definitive view based on the bare bones information reported in the stories about the booting up cases, waiting for a computer to boot up would appear to be constitute work under the applicable principles. If employers are truly concerned about work time lost to boot up time, they should develop technological solutions that assure their computer systems are ready when employees arrive for work.

New FMLA Regulations

The U.S. Department of Labor has issued its long-awaited amendments to its regulations under the Family and Medical Leave Act. Published on November 17, 2008, the new rules will take effect on January 16, 2009. The Department issued a press release that summarizes the changes. The full text of the publication in the Federal Register is available here. The Department has also published a fact sheet that describes the amendments.

The basics of FMLA remain the same, but employers should take note of the following significant changes:

1. The Department has exercised its authority under the new military family leave provisions of the FMLA to define the qualifying exigencies for which employees with relatives who are in the National Guard or Reserves can use FMLA leave as follows: (1) short-notice deployment, (2) military events and related activities, (3) childcare and school activities, (4) financial and legal arrangements, (5) counseling, (6) rest and recuperation, (7) post-deployment activities, and (8) other activities that the employer and employee agree on.

2. When paid leave is substituted for FMLA leave, all forms of employer paid leave (vacation, sick leave, personal time off, and so on) will be treated the same.

3. The regulations revamp the employer notice obligations. Employers must provide (1) a general notice about FMLA rights, (2) an eligibility notice, (3) a rights and responsibilities notice, and (4) a designation notice. The regulations include new forms to assist employers in complying with their notice obligations. The forms (which include ones tailored to the new military family leave provisions) do not yet appear independently on the Department's website, but are included as appendixes to the regulations.

4. The regulations rework the medical certification process, and provide a new suggested form for obtaining certification. California employers should note that the new Form WH-380 medical certification still asks the medical provider for "medical facts" (including "diagnosis") about the employee's condition. A California Family Rights Act regulation prohibits employers from obtaining such information without patient authorization.