Similar to the federal Fair Labor Standards Act (FLSA), California law requires an employer to pay overtime based on an employee’s “regular rate of pay.” That rate may not be just an employee’s hourly wage, or straight time, rate.
Non-discretionary bonuses and certain other amounts also must be included in the regular rate, resulting in a higher overtime rate of pay. As a result, employers often must recalculate an employee’s regular rate — and sometimes make a further “true up” payment of additional overtime later when paying a bonus that covered a longer period.
Under the federal FLSA, the US Department of Labor’s regulations long have recognized an exception to the recalculation obligation for a “percentage bonus.” There, when an employer pays a bonus based on the same percentage of an employee’s total non-overtime and overtime wages, an employer can avoid having to recalculate the overtime regular rate to include the percentage bonus. In its recent decision in Lemm v. Ecolab Inc., the California Court of Appeal held that California employers lawfully may use this same approach under the state’s law. This development makes clear that California employers may use this helpful approach – as long as they do so correctly.
Ecolab involved an overtime non-exempt route sales manager, who worked overtime. Under its annual incentive compensation plan, the employer paid him an hourly wage and a nondiscretionary monthly bonus. The...
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