In recent news, the California Court of Appeal held that percentage bonuses provided by employers that are based on a combination of regular and overtime hours comply with employment law.

The Case: Lemm v. Ecolab

The Court: Los Angeles County Superior Court

The Case No.: B312232

The Background: Lemm v. Ecolab

The plaintiff in the case, Lemm, worked for EcoLab as a non-exempt sales manager. Lemm was given a specific route and regularly worked more than 12 hours daily and more than 40 hours in one week. EcoLab used a pay system with certain multipliers triggered when employees met specific metrics with the employee’s hourly rate of pay used as the base pay ((base wage + overtime wages + double-time wages) x 5%). EcoLab’s policy to pay 1.5x and 2.0x his hourly rate for qualifying overtime and double time hours was not disputed. This type of payment policy is typically referred to as a percentage bonus. Percentage bonus payment systems are authorized under Fair Labor Standards Act (FLSA) regulations.

Progression of the Case: Lemm v. Ecolab

The plaintiff, Lemm, argued that EcoLab should have used an overtime calculation method applicable to flat rate bonuses under California law. In contrast, EcoLab argued that their percentage bonus plan complied with California and federal law. The trial court sided with EcoLab, rejecting an alternate interpretation of California law requiring employers to pay overtime on overtime when using percentage bonus plans. Using this interpretation would have left California employers with percentage bonus plan systems in place significantly exposed. Lemm appealed.

The Case: Lemm v. Ecolab

On appeal, the court held that EcoLab’s percentage bonus plan complied with California employment law. The appellate court pointed out that the Ninth Circuit and several other California District Courts previously held that percentage bonuses were lawful methods to calculate additional overtime wages due to contingent compensation in California. The court also noted that paying a federal “percentage bonus” generated the same overtime pay as the “true-ups” generated by a formula published in the Department of Labor Standards Enforcement Manual or DLSE Manual (not a binding authority, but a type of underground regulation without the weight given to IWC wage orders). The formula Lemm argued should be used to calculate his pay is also in the same manual. It is the standard the California Supreme Court adopted as proper for flat sum bonus calculations. Requiring EcoLab to apply this formula on top of their existing percentage bonus would result in overtime on overtime contravening Labor Code section 510 and the Wage Orders. The findings in this case set forth a standard or roadmap for approaching sales-based compensation for California employees.

If you have questions about how to file a California overtime lawsuit, please get in touch with Blumenthal Nordrehaug Bhowmik DeBlouw LLP. Experienced overtime attorneys are ready to assist you in various law firm offices in San Diego, San Francisco, Sacramento, Los Angeles, Riverside, and Chicago.