One might be tempted to conclude that all of the novel issues surrounding overtime pay would long ago have been exhausted.  But being that this is a law blog, and seeing as how this blog emphasizes developments in California law, you already know that this is a post about a new issue in overtime litigation.  In Marin v. Costco Wholesale Corporation (December 23, 2008), the Court of Appeal (First Appellate District, Division One), in a case of first impression, reviewed the lawfulness of Costco's formula for calculating overtime pay on semi-annual bonuses paid to hourly employees.

First, some clarifying information is in order.  The bonuses at issue in Marin were "nondiscretionary" bonuses that were paid out based upon the number of hours that certain long-term employees worked during the six months period before the semi-annual bonus dates.  (Slip op., at pp. 1-2.)  This type of bonus is distinguished from discretionary bonuses (such as year-end bonuses issued only when the employer declares a bonus) because nondiscretionary bonuses are, essentially, deferred compensation tied in some way to production (which, in this case, is simply the hours worked).  The Court explained generally how Costco's plan functions:

“Costco pays a formulaic bonus, based on paid hours, to long-term hourly employees. 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.

(Slip op., at pp. 1-2, footnote omitted.)  The Court then explained how the parties calculated overtime owed to certain employees:

“Defendant calculated the overtime owed on 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) to determine a regular hourly bonus rate, and then by multiplying the number of overtime hours worked during the bonus period by one-half of that regular bonus rate. Plaintiffs contend that defendant was required to calculate the regular bonus rate by dividing the base bonus the employee earned by the number of straight time hours worked during the bonus period, and then multiply the number of overtime hours by 1.5 times that regular bonus rate.

For example, under defendant’s formula, an employee who achieves a maximum base bonus of $2,500 by virtue of being paid for 840 straight time hours, 100 overtime hours, and 100 vacation hours during the bonus period is entitled to $125 of overtime pay on the bonus, calculated as follows: $2,500 (maximum base bonus) ÷ 1,000 (paid hours required for maximum base bonus) = $2.50 (regular hourly bonus rate) × 100 (overtime hours) × 0.5 = $125. Under plaintiffs’ formula, the same employee would receive $477 overtime on the bonus: $2,500 (base bonus earned) ÷ 840 (straight time hours worked) = $2.98 (regular bonus rate) × 100 (overtime hours) × 1.5 = $447.

(Slip op., at pp. 3-4.)

Turning to the opinion's analysis, the Court examined Skyline Homes, Inc v. Department of Industrial Relations (1985) 165 Cal.App.3d 239, Tidewater Marine Western, Inc. v. Bradshaw (1996) 14 Cal.4th 557 and the "Division of Labor Standards Enforcement’s (DLSE) 2002 Enforcement Policies and Interpretations Manual (Manual) distinguishing 'flat sum' bonuses (Manual § 49.2.4.2) from bonuses 'based on a percentage of production or some formula other than a flat amount' (Manual § 49.2.4)" in its search for a framework in which to evaluate Costco's plan. The Court concluded that no source of controlling law specified a formula for calculating overtime on the nondiscretionary bonuses issued by Costco:

“In sum, no California court decision, statute, or regulation governs bonus overtime, the DLSE Manual sections on the subject do not have the force of law, and the DLSE advice letters on the subject are not on point. Consequently, defendant’s bonus plan cannot be deemed to violate California law. While this conclusion is dispositive of plaintiffs’ state law claims, we proceed to explain why in practical effect defendant’s bonus plan comports with the rationales for the pertinent sections of the Manual.

(Slip op., at p. 13.)  The primary reason that Costco's bonus plan caused any difficulty is that it operates as a hybrid of a "production" bonus and a "flat amount" bonus when employees work more than 1,000 hours in the six-month period used to calculate the bonus: "Defendant’s bonus does not fit neatly into either of the categories the DLSE has posited: bonuses for a “flat sum, such as $300 for continuing to the end of the season, or $5.00 for each day worked” (Manual § 49.2.4.2) and bonuses earned each payday “based on a percentage of production or some formula other than a flat amount” (Manual § 49.2.4)." (Slip op., at p. 13.).

After examining the public policies surrounding overtime premiums, and the various incentives created by overtime premiums, the Court concluded that Costco's plan did not run afoul of those concerns in a way that required a court to declare Costco's plan unlawful:  "To recapitulate, defendant’s bonus is in the nature of a production bonus until the 1,000 paid hour threshold is reached, and while the bonus has some qualities of a flat sum bonus on hours paid thereafter, it does not encourage imposition of overtime during the post-1,000 hour period in a way that would support the use of the DLSE’s flat sum bonus formula even as to overtime worked during that period." (Slip op., at p. 17.)

Of note, the Court of Appeal concluded that section 49.2.4.2 of the DLSE's Manual governing "flat sum" bonuses is a void regulation under Tidewater, because it was not  "'a standard of general application interpreting the law the DLSE enforce[s],' and 'not merely a restatement of prior agency decisions or advice letters.'" (Slip op., at p. 12.)

Of further note, the appellate counsel on both sides of this appeal were highly qualified, so I assume that they provided the Court of Appeal with high-quality policy arguments in a case of first impression where even suggestive authority is sparse.

Other blogs noting the decision include What's New in Employment Law.