Employers got a rare win in a regular rate case earlier this month. In Lemm v. Ecolab, Inc., the Second District cemented California’s adoption of the percentage of total earnings bonus exemption to the regular rate for overtime purposes—rejecting the Department of Labor Standards Enforcement Manual’s contrary guidance. The Court held that where Employers use non-exempt employees’ total eligible compensation to calculate bonuses, including e.g., straight time, overtime, and double time, they are not required to recalculate the regular rate for overtime. Doing so would result in “overtime on overtime.” Because federal law has codified this exemption (22 C.F.R. 778.210), an appeal is unlikely.
Thus, an employer may have a monthly, quarterly, or annual bonus calculated on a percentage of total earnings during the applicable period and not have to look back and pay additional premiums on that bonus. That is good news that makes paying non-discretionary bonuses less complicated.
Keep in mind, however, that this exemption does not exclude premium pay (for meal periods and rest breaks) or sick pay during the bonus period. Employers must still calculate the regular rate for premiums paid and sick pay used during the bonus period. Further, this exemption is separate and apart from other regular rate obligations. For example, a compensation plan with both a percentage of total earnings bonus and a different type of non-discretionary bonus still requires employers to calculate the regular rate on the non-discretionary bonus (including for overtime).
The percentage of total earnings bonus remains a limited exception that employers may utilize to avoid calculating regular rate on overtime for that additional bonus payment, looking back on the bonus period. Employers must continue calculating the regular rate for overtime, meal/rest premium pay and sick pay for other non-discretionary pay. Employers should also evaluate historical and projected pay data to determine whether using the percentage of total earnings bonus is cost effective.