Ecolab Ruling Opens Doors For Percentage Bonuses In Calif.

Similar to the federal Fair Labor Standards Act, California law requires an employer to pay overtime based on an employee’s “regular rate of pay.”[1]

They both require that nondiscretionary bonuses be included in the regular rate. While employers often would like to incentivize and reward employees by offering and paying bonuses, one major drawback of doing so has been the resulting obligation in most cases to have to recalculate the employee’s regular rate and thus pay a higher overtime rate of pay.  

Is there a legal way to avoid this payroll headache in California? The U.S. Department of Labor’s FLSA regulations long have recognized an exception to the recalculation obligation for a so-called percentage bonus.

There, when an employer pays a bonus based on the same percentage of an employee’s total nonovertime and overtime wages for the bonus period, an employer can avoid having to recalculate the overtime regular rate to include that bonus. But California had not specifically addressed whether state law allows employers the same option.

Fortunately for California employers, the Court of Appeal of the State of California, Second Appellate District, recently held in Lemm v. Ecolab Inc.[2] that California law allows the percentage bonus without having to recalculate the regular rate.

The court recognized that having to include a percentage bonus in the regular rate and pay supplemental overtime illogically would result in payment of “overtime on overtime.”[3] To avoid regular rate issues with nondiscretionary bonuses, California employers can and should consider using the percentage bonus now.

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