94 Litigating CA Wage & Hour Class and PAGA Actions (23rd Edition) Seyfarth Shaw LLP | www.seyfarth.com Excludable Benefits. Employer contributions to benefit plans like retirement, life insurance, and health insurance are not considered compensation when calculating the regular rate so long as the plan meets certain requirements. 1. Discretionary Versus Non-Discretionary Bonuses Discretionary bonuses may be excluded from an employee’s regular rate of pay. However, they can be a trap for the unwary. A bonus is discretionary only if the employer retains discretion over the fact of payment and the amount “until a time quite close to the end of the period for which the bonus is paid.”459 The sum, if any, must be determined by the employer without prior promise or agreement and the employee must have no contractual right (express or implied) to any amount. If an employer announces a bonus in advance, it has abandoned its discretion even if the amount of the bonus remains undetermined or if the employer states that it may elect not to pay the bonus later for various reasons. A bonus promised in advance must be included in an employee’s regular rate of pay. 2. Percentage-of-Earnings Payments Under a recent California Court of Appeal decision, “percentage-of-earnings” bonuses are also excluded from the regular rate for purposes of calculating an employee’s overtime rate of pay.460 In Lemm v. Ecolab, 87 Cal. App. 5th 159 (2023), the plaintiff earned hourly wages as well as a nondiscretionary monthly bonus equal to about 5% of her gross wages. Plaintiff’s “gross wages” for purposes of the bonus included her straight-time, overtime, and double time wages. The company did not incorporate the bonus into plaintiff’s regular rate of pay for purposes of calculating her overtime wages. After plaintiff filed suit, the trial court granted summary adjudication for the employer and the Court of Appeal affirmed. Relying on a longstanding federal regulation permitting exclusion of percentage of total earnings bonuses (29 C.F.R. Section 778.210), the court explained that “[b]y paying a bonus based on a percentage of gross earnings that includes overtime payments, the employer automatically pays overtime simultaneously on the bonus amount.” Lemm, 87 Cal. App. 5th at 167. The employer need not pay “overtime on overtime” by calculating the bonus into the employee’s regular rate of pay. B. Calculating the Regular Rate Apart from knowing what to include in calculating the regular rate, it is equally important for employers to understand how to calculate the regular rate. The manner of calculating an employee’s regular rate varies depending on the compensation plan at issue and the period over which the compensation is earned.461 Below are several examples illustrating how to incorporate some common forms of pay into an employee’s regular rate. 459 29 C.F.R. § 778.211 460 The facts of Lemm were limited to the calculation of the regular rate of pay for purposes of paying overtime and doubletime wages. There is no case law extending the reasoning of Lemm or 29 C.F.R. section 778.210 to the payment of meal or rest period premiums or sick leave at an employee’s regular rate of pay. However, the reasoning should follow. By including, e.g., meal period premiums in a percentage-of-earnings bonus, an employer should be positioned to argue that it pays an increase in the meal period premium simultaneously on the bonus amount. 461 If compensation is earned during a single workweek, it should be allocated only to overtime, meal and rest period premiums, reporting time pay, and statutory sick leave paid during that workweek. However, where compensation (like a bonus or commission) is earned over a period of longer than a workweek, the compensation must be incorporated into the
RkJQdWJsaXNoZXIy OTkwMTQ4