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That seemingly simple proposition was not easily reconciled with section 515(d) of the California Labor Code. Section 515(d) was passed after the older case law on which the Court of Appeal relied in Arechiga. Section 515(d) states that the hourly rate of a non-exempt employee who is paid a salary is calculated by dividing the salary by forty. That formula does not seem to leave room to build overtime into a salary.

In addition to the issues posed under state law by including overtime in a salary, employers need to be mindful of other issues under both federal and California law. Under federal and California law, an employer must always pay overtime when an employee exceeds the number of overtime hours built into the salary. More important, under federal law, an employer can include a guarantee of overtime hours in a salary only where all of the many requirements for a “Belo” plan are met. The many detailed requirements for a Belo plan should be reviewed by an employer before implementing such a plan.

It may be best to think of the result in Arichega as no more than an arithmetic shorthand for telling an employee what the employee would earn if and only if the employee actually worked a schedule that included a regular number of overtime hours of work. Advising employees of their hourly rates and paying non-exempt employees by the hour will always be a more secure option in California.

Photo credit: Christian Baitg

The court in Bell reached its conclusion by applying the administrative/production dichotomy and did not address whether the adjusters met the duties standards set forth in the language of Industrial Welfare Commission Wage Order No. 4-2001. Under the administrative/production dichotomy, employees whose primary duty is producing the goods or services the employer produces are not considered exempt administrative employees. By necessity, application of the administrative/production dichotomy requires consideration of the nature of the employer’s business. The court in Hodge said this test was not useful and rejected the notion that “every enterprise can be subjected to a simplistic parsing of its ‘primary’ business function for purposes of labeling administrative versus production-level, rank-and-file workers.” Ultimately, however, the court said it would have reached the same conclusion even had it applied the administrative/production dichotomy.

The court in Hodge, unlike Bell, analyzed the exemption by applying the duties standards set forth in the Wage Order and distinguished the holding in Bell saying that outcome was unique to those facts. For example, the court emphasized, the claims manual in Bell specifically stated that questions of importance had to be decided by the branch claims manager or regional claims manager. The adjusters processed a large number of small claims and almost all of the claims were between $2,000 and $8,000. Also, in Bell, the adjusters’ authority to settle claims was set at $15,000 or lower—often $5,000 or lower. Significantly, on matters of importance, the claims representatives in Bell acted only as conduits of information that their supervisors used to make decisions.

By contrast, the adjusters in Hodge investigated claims, reviewed evidence, determined coverage questions, set reserves, authorized settlement or litigation and made independent conclusions about elements such as causation and appropriate compensation. These conclusions were based on facts gathered during investigations and were made by the insurance adjusters using their judgment, training and experience. The court said the setting of reserves—allocating an estimate of the total costs for a claim—is equivalent to the adjusters spending the clients’ money. The adjusters’ reserve authority was generally between $20,000 and $100,000, and the aggregate reserves set by an individual adjuster could tie up millions of dollars. The adjusters also negotiated and settled claims, managed litigation, made recommendations and worked with counsel in developing litigation plans.

While the decision in Hodge is a favorable one for employers, the California Supreme Court is expected to weigh in soon when it issues a decision in Harris v. Superior Court (Liberty Mutual Ins. Co.), 154 Cal. App. 4th 164 (2007). The California Supreme Court will decide the weight to be given to the administrative/production dichotomy under Wage Order No. 4-2001 as well as the proper analysis of the administrative exemption under the Wage Order.

This entry was written by Michael Gregg.

Photo credit: Digiphoto

The trial court found that Arechiga’s supervisor had satisfied all of the requirements necessary to have an enforceable wage agreement under cases which pre-dated the passage of section 515(d). Those six factors are: (1) the employee was told the days he would work each week (six); (2) the number of hours he would work each day (eleven); (3) the guaranteed salary of a specific amount that the employee would be paid ($880 per week); (4) the basic hourly rate upon which his salary was based (true); (5) that his salary covered both his regular and overtime hours (true); and (6) the agreement was reached before the work was performed (also true). See Espinoza v. Classic Pizza, Inc., 114 Cal. App. 4th 968, 974 (2003); Ghory v. Al-Lahham, 209 Cal. App. 3d 1487, 1491 (1989); Hernandez v. Mendoza, 199 Cal. App. 3d 721, 725 (1988); Alcala v. Western Ag Enterprises, 182 Cal. App. 3d 546, 550–51 (1986). Arechiga’s straight-time rate of $11.14 and overtime rate of $16.71 totaled $880 for the 40 straight-time and 26 overtime hours in each of his workweeks.

The surprise was that the Court of Appeal found the agreement between Arechiga and his employer trumped California Labor Code section 515(d). That section provides: “For the purpose of computing the overtime rate of compensation required to be paid to a nonexempt full-time salaried employee, the employee's regular hourly rate shall be 1/40th of the employee's weekly salary.” Section 515(d) is commonly thought to incorporate the “Skyline Homes” rule. Skyline Homes v. Dep’t of Industrial Relations, 165 Cal. App. 3d 239 (1985). Under Skyline Homes, the overtime that is due an employee who was only paid a salary is determined for most employees by dividing the salary by forty hours. One and one half times the result of dividing a salary by 40 must be paid for each overtime hour of work.

The Court of Appeal’s finding that the wage agreement survived the passage of section 515(d) was not the subject of extensive analysis. The court concluded that overtime may not be waived, but that the basic hourly rate on which overtime is to be paid is still subject to agreement between the parties. The court set aside the portion of the Labor Commissioner’s Enforcement Policies and Interpretations Manual which condemned agreements such as Arechiga’s because the Manual had not been promulgated in accordance with the Administrative Procedure Act.

While Arechiga v. Dolores Press may provide a measure of comfort for some employers, some of the unarticulated exceptions to the decision should be noted. A wage agreement may include some overtime, but, if an employee works more hours than are included in the agreement, additional overtime will be due. A wage agreement may appear generous or even beneficial to an employee if the full salary is provided even when the employee works fewer than the expected hours. However, a salary that guarantees a nonexempt employee overtime, even if the employee does not work the overtime, has to meet the requirements of the federal Fair Labor Standards Act for employers who are subject to the FLSA. 29 U.S.C. §§ 201 et seq. Under the FLSA, a salary that includes overtime, whether overtime was worked or not, is only valid if it meets all of the requirements of section 7(f) of the FLSA. Section 7(f) includes a requirement that an employee’s hours vary for reasons beyond the employer’s control and that the guarantee not include more than 60 hours per week. 29 U.S.C. § 207(f). Furthermore, the United States Department of Labor and some courts would say that a fluctuating hours agreement (called a Belo agreement) is only valid if an employee’s hours vary both above and below 40 in a week. 29 C.F.R. § 778.406. Whether Arechiga made any claim under the FLSA, whether his employer was covered by the FLSA and whether all of the requirements of a BELO agreement were met are not addressed in the California Court of Appeal’s opinion. And, whether Arechiga ever worked more or fewer hours than those in his agreed schedule is not noted in the court’s opinion. The odds of an employee indefinitely working the same hours day in and day out are, however, limited. Once the employee works more hours, additional overtime must be paid. Once an employee works fewer hours, the requirements of section 207(f) must be met or the employee’s salary must be docked. Even if the requirements of section 207(f) are met, there is no specific accommodation of such plans under California’s Labor Code.

In sum, the California Court of Appeal’s conclusion that Arechiga’s wage agreement was enforceable despite the seeming hurdle imposed by section 515(d) of the Labor Code is a surprise, albeit a welcome one. Any employer thinking of using such an agreement must, however, consider the more likely restrictions of federal law before concluding that all of the employer’s overtime concerns have been resolved.

This entry was written by R. Brian Dixon.

Photo credit: MBPhoto, Inc.

The rules are a bit more complex for exempt employees, however, who must be paid on a salary basis. The general rule is that exempt employees must be paid their full salary for any week in which they perform any work, unless a deduction is specifically permitted under 29 C.F.R. § 541.602(b). Section 541.602(b)(1) allows deductions for full-day absences taken for “personal reasons.” But, is a snow day a “personal reason”?

The U.S. Department of Labor (DOL) addressed this issue in two Opinion Letters issued in 2005. DOL Opinion Letter FLSA2005-46 provides that deductions may be made from an exempt employee’s salary if the employer is open for business and the employee chooses not to report to work: "The Department of Labor considers an absence due to adverse weather conditions, such as when transportation difficulties experienced during a snow emergency cause an employee to choose not to report for work for the day even though the employer is open for business, an absence for personal reasons.” The DOL cautioned, however, that such “personal reasons” deductions “must be in full-day increments (not partial day deductions).”

Further, “[n]o deductions from salary can be made if the employer closes operations – this is considered an impermissible deduction "for absences occasioned by the employer or the operating requirements of the business."

Even when an employer closes operations, however, employees can be required to use accrued paid leave, such as paid vacation or a paid leave bank. DOL Opinion Letter FLSA2005-41 states that, since employers are not required under the FLSA to provide any paid leave to employees, “there is no prohibition on an employer giving vacation time and later requiring that such vacation time be taken on a specific day(s).” Therefore, an employer may direct exempt employees “to take vacation or debit their leave bank account” when the office or operations are closed due to inclement weather or other disasters, “whether for a full or partial day’s absence, provided the employees receive in payment an amount equal to their guaranteed salary.”

Cutting through the fog, the DOL’s guidance can be summarized in three simple rules:

1. Non-exempt employees need not be paid when they do not work due to inclement weather or a disaster under the FLSA.
2. If the company is open for business, an employer may make deductions, in full-day increments, from the salary of exempt employees who do not come to work due to inclement weather or a disasters.
3. If the company closes operations, the employer cannot make deductions from salary, but can require the employee to use accrued paid leave, either in partial-day or full-day increments.

This entry was written by Tammy McCutchen.

Photo credit: Randen Pederson

Tip Sharing and Tip Pooling: Employers now may require tip pooling and set the percentages for each position. The regulations clarify that, in order to be eligible to receive shared tips or a distribution from a tip pool, employees must perform, or assist in performing, personal service to patrons at a level that is a “principal and regular part of their duties and is not merely occasional or incidental.” Employers who operate a tip sharing or tip pooling system must also maintain records for six years.

Service Charges: Any added charge for service or the like is presumed to be a gratuity and must be distributed to the food service workers who provided the service. To avoid having a mandatory charge purport to be a gratuity, administrative charges, overhead fees, operations charges or similar charges in connection with a banquet or special function must be clearly identified as such, and customers must be specifically notified that the charge is not a gratuity or tip. Adequate notification must include a statement in the banquet or event agreement, and on any menu or bill listing practices, that the fee is not purported to be a gratuity and will not be distributed as a gratuity to the employees who provide service to guests. The notice must appear, at least, in font size similar to surrounding text, and must immediately follow the disclosure of the charge.

Written Notice of Pay Rates, Tip Credit and Pay Day: Prior to the start of employment, and any time an employee’s hourly rate of pay is changed, an employer must give an employee written notice of the: (1) regular hourly pay rate; (2) overtime hourly pay rate; (3) the amount of tip credit taken, if any; and (4) the regular pay day. The notice must also state that extra pay is required if the employee’s tips are ever insufficient to bring the employee up to the basic minimum hourly rate. The notice must be provided in English and any other language spoken by the employee as his or her primary language. Employers must obtain an acknowledgement of receipt from their employees of this notice, and such acknowledgment must be retained by the employer for six years.

This entry was written by Andrew Marks.

Background

Plaintiffs are former pharmaceutical sales representatives (“PSRs”) for Alpharma, Inc., a manufacturer of pain medication that is now owned by King Pharmaceuticals. On July 10, 2007, the plaintiffs filed a complaint alleging they are due unpaid wages and overtime pursuant to the FLSA. Thereafter, on March 24, 2009, the court granted Alpharma, Inc.’s motion to stay the proceedings pending the outcome of Smith v. Johnson & Johnson in the Third Circuit Court of Appeals. Following the Third Circuit’s decision in Smith, Alpharma filed a motion for summary judgment before the instant court.

Analysis

The court held that the former PSRs qualify for the administrative exemption and analyzed the three-prong test that the Secretary of Labor sets forth in the administrative regulations. Under the test, an administrative employee must (1) make no less than $455 per week; (2) perform “non-manual work directly related to the management or general business operations of the employer;” and (3) exercise sufficient “discretion and independent judgment with respect to matters of significance.”

With the weekly salary requirement conceded by the parties, the court held that the second prong of the administrative exemption test was met, reasoning that the PSRs were involved in “marketing” and “promoting sales.” The court recognized that federal statutes and regulations prohibit the sale of Alpharma’s prescription medication directly to the public. The PSRs “called on doctors and pharmacies to encourage them to prescribe or stock Alpharma’s products over the products of its competitors.”

Concerning the third prong, the court further examined federal regulations defining the exercise of discretion and independent judgment as involving “the comparison and evaluation of possible courses of conduct, and acting or making a decision after the various possibilities have been considered.”

Alpharma relied heavily on the Third Circuit’s holding in Smith that “a pharmaceutical sales representative was not entitled to overtime pay because she qualified for the administrative exemption under the FLSA.” The district court noted that the plaintiff in Smith “described herself as ‘the manager of her own business who could run her own territory as she saw fit.’”

The court stated that “the facts in Smith are startlingly similar to the case at bar.” The court identified the following similarities: the employer gave Smith a list of target doctors including “high-priority” doctors, set a minimum number of doctors to visit per-day, permitted Smith to determine the order of doctor visits each day, provided Smith with a prepared “message,” allowed Smith “some discretion when deciding how to approach the conversation,” provided Smith with visual aids and did not allow her to use other aids.

The PSRs here worked alone, developed business plans, decided their “routing” (i.e., when and where to travel), and determined the doctors to meet with each day “in order to effectuate the most business.” The court stated that the PSRs also had discretion to decide “how to approach the physician.”

On the other hand, the plaintiffs characterized Alpharma’s PSR supervisors as “micro managers,” and argued that the PSR in Smith was more of a “freelancer.” The plaintiffs also urged the court to examine the full list of factors set forth in the regulations for determining “whether or not an employee exercises the requisite discretion and judgment to fit within the exemption.”

The court reasoned that the plaintiffs satisfied the same two factors as the plaintiff in Smith. First, the court noted that the PSRs’ work “affects business operations to a substantial degree.” Second, the court stated that the PSRs “are ‘involved in planning long-or short-term business objectives’ related to the marketing of their products within their territories.”

In addition to satisfaction of these two factors, the court stated that its conclusions were “buttressed by the plaintiffs’ duties to write reports and business plans to determine where their business was coming from, to detect trends in the sales of the drug, and to generate ideas on how to grow the business.”

The plaintiffs submitted supplemental submissions to direct the court’s attention to other PSR misclassification cases: Jirak v. Abbott Laboratories, Inc. and In re Novartis Wage and Hour Litigation. The court found it unnecessary to discuss these cases in light of the Third Circuit’s decision in Smith and in a subsequent nonprecedential opinion.

This entry was written by Michael Harvey.

When the case was considered by the district court, it dismissed the plaintiffs’ claims, finding the Reps were exempt employees under both the “outside sales” and “administrative” exemptions set forth in the FLSA. Analyzing first the outside sales exemption, the district court concluded that even though the Reps “may not ‘sell’” in a “technical[ ]” sense, they do “make sales in the sense that sales are made in the pharmaceutical industry” and therefore they meet the “spirit and the letter” of the outside sales exemption. The district court also found that the Reps meet the administrative exemption, because they “exercise discretion and independent judgment with respect to matters of significance” when they meet with physicians, provide them with information about the company’s products, and attempt to get commitments to prescribe the products. The Second Circuit reversed and held that the Reps do not meet either exemption.

Outside Sales Exemption

The Second Circuit concluded that the Novartis Reps do not meet the requirements of the outside sales exemption because they do not “make sales.” The court relied heavily on the Secretary of Labor’s amicus curiae position that a “sale” requires an exchange of consideration between buyer and seller and that, at best, Reps simply seek a positive affirmation from physicians that they will prescribe Novartis’s products in the future.

Although Novartis argued that the preamble to the regulations accompanying the FLSA provides that “commitments to buy” may constitute “making sales” under the exemption, the court rejected the argument as applied to this case. It held that “[t]he type of ‘commitment’ the Reps seek and sometimes receive from physicians is not a commitment ‘to buy’ and is not even a binding commitment to prescribe.”

Administrative Exemption

The plaintiffs also challenged the application of the administrative exemption based on the degree of discretion the Novartis Reps have in the performance of their duties. The Second Circuit again deferred to the Secretary of Labor’s interpretation of the regulations and her position regarding their application to the facts of the case. It noted that, despite the importance of the Reps’ efforts to promote the company’s products, there was “no evidence in the record that the Reps have any authority to formulate, affect, interpret, or implement Novartis’s management policies or its operating practices, or that they are involved in planning Novartis’s long-term or short-term business objectives, or that they carry out major assignments in conducting the operations of Novartis’s business, or that they have any authority to commit Novartis in matters that have significant financial impact.” Instead, the Second Circuit accepted the plaintiffs’ claim that they do “low-level discretionless marketing work, strictly controlled by Novartis” and concluded that they did not exercise sufficient discretion and independent judgment to satisfy the administrative exemption. 

This entry was written by Lori Alexander, Michael Harvey, and Theresa Waugh.

¹ On the same day the In re Novartis ruling was issued (July 6, 2010), the Second Circuit also issued a summary order in Kuzinski v. Schering Corp., 2d Cir. No. 09-1945-cv, affirming the district court’s denial of summary judgment in a similar case.

Under the FLSA, compensation for overtime need not be provided to “any employee...in the capacity as an outside salesperson.” 29 U.S.C. § 213(a)(1). To qualify as an outside salesperson, (1) the employee’s “primary duty” must be “making sales” or “obtaining orders or contracts,” and (2) he or she must customarily and regularly be engaged away from the employer’s place of business in performing such duty. 29 C.F.R § 541.500(a). Both parties agreed that PSRs met the second requirement, so the only disputed issue was whether their primary duty was making sales.

The FLSA defines sales as “any sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition.” 29 U.S.C. § 203(k). Moreover, sales include “the transfer of title to tangible property, and in certain cases, of tangible and valuable evidences of intangible property.” 29 C.F.R. § 541.501(b). Whether an employee makes sales requires an objective analysis, and according to the U.S. Department of Labor (DOL) making sales includes “obtain[ing] a commitment to buy from the customer,” which resulted in the salesperson being “credited with the sale.” U.S. Department of Labor, Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees, 69 Fed. Reg. 22122, 22162 (Apr. 23, 2004). According to the court, under the DOL regulations, there is no requirement that commitments be binding. All that is required is that a sale be made “in some sense.”

In Christopher, the PSRs argued that they did not make sales because they did not consummate transactions or take orders. Instead, they claimed they merely promoted products. Moreover, PSRs contended their activities did not constitute sales because the U.S. Food and Drug Administration expressly prohibited pharmaceutical companies from selling directly to physicians or patients. According to the PSRs, sales only occurred between the pharmaceutical company and wholesalers.

The court noted that opinions differed among the federal courts whether PSRs made sales. A federal court in Connecticut concluded that PSRs did not qualify for the exemption because they could not sell, and physicians could not buy, products. Ruggeri v. Boehringer Ingelheim Pharms., Inc., 585 F. Supp. 2d 254, 268 (D. Conn. 2008). However, a court in New York held that PSRs were exempt because they were credited with sales when physicians wrote prescriptions. In re Novartis Wage & Hour Litigation, 593 F. Supp. 2d 637, 648 (S.D.N.Y. 2009) (on appeal to the United States Court of Appeals for the Second Circuit). To determine whether PSRs qualified as outside salespeople, the court in Christopher looked to the rationale behind the outside sales exemption and also examined the position in the context of the pharmaceutical industry.

According to the court, the characteristics of PSRs justified exemption. PSRs were compensated well above the federal minimum wage (up to $100,000 per year), received fringe benefits like incentive bonuses in lieu of overtime, were unsupervised, and had better opportunities for advancement than non-exempt employees. Additionally, the kind of work they performed was “difficult to standardize to any time frame and could not be easily spread to other workers after 40 hours in a week, making compliance with overtime provisions difficult.” (quoting U.S. Department of Labor, 69 Fed. Reg. at 22124.)

The court observed that although the FLSA was enacted prior to the development of the pharmaceutical sales industry, it was intentionally broad to “address a multiplicity of industries found in the national economy and accordingly provide flexibility in the definition of a ‘sale.’” Moreover, the industry’s unique nature, i.e., the prohibition of direct sales, shifted the focus of sales efforts from the consumer to the physician, thereby making “[a] PSR’s ultimate goal [the] close [of] an encounter with a physician by obtaining a non-binding commitment from the physician to prescribe the PSR’s assigned product.” PSRs worked longer and irregular hours to generate sales in their territory for which they received compensation in the form of bonuses. The court concluded that PSRs “plainly and unmistakably fit within the terms of the exemption” because they engaged in “the functional equivalent of an outside salesperson and to hold otherwise is to ignore reality in favor of form over substance.”

The exempt status of pharmaceutical sales representatives continues to be litigated in courts across the country, and the issue is not settled. In the Novartis appeal referenced above, the U.S. Department of Labor filed an amicus brief arguing that pharmaceutical sales representatives do not qualify for the “outside sales” exemption. 

This entry was written by Robert Pritchard.

¹ Note: In the decision, SmithKlineBeecham is spelled as SmithKleinBeecham, which is an error.

Image credit: Alan Smithee

More specifically, per the California Division of Labor Standards Enforcement’s Enforcement Policies and Interpretations Manual (DLSE Manual), production bonuses are those “based on a percentage of production or some formula other than a flat amount [which] can be computed and paid with the wages for the pay period to which the bonus is applicable.” Because such bonuses are earned during straight time as well as overtime hours, the “regular rate” for such a bonus is calculated by dividing the bonus by the total hours worked (including overtime hours) during the period to which the bonus applies. The overtime premium due on the bonus is then calculated multiplying one-half of the regular rate for the bonus by the number of overtime hours worked during the period in which the bonus was earned.

In contrast, where the bonus at issue is a flat sum, such as $300 for continuing to the end of the season, or $5for each day worked, the DLSE Manual indicates that the regular bonus rate is determined by dividing the bonus by the maximum legal regular hours (i.e., straight time hours) worked during the period to which the bonus applies. According to the DLSE, such flat sum bonuses are “not designed to be an incentive for increased production for each hour of work; but, instead [are] designed to insure that the employee remain[s] in the employ of the employer.” Thus, “to allow [such a] bonus to be calculated by dividing by the total (instead of the straight time hours) would encourage, rather than discourage, the use of overtime.” Consequently, the DLSE Manual states that the premium due on flat sum bonuses is 1.5 times the regular rate of the bonus for each overtime hour worked during the time period at issue.

The court in Marin v. Costco held that the portion of the DLSE Manual governing “flat sum” bonuses is a void regulation under the reasoning of Tidewater Marine Western, Inc. v. Bradshaw (1996) 14 Cal.4th 557. Specifically, that portion of the DLSE Manual is “a standard of general application interpreting the law the DLSE enforce[s],” and “not merely a restatement of prior agency decisions or advice letters.” Accordingly, it does not have the force of law.

The court then addressed the legality of the manner in which Costco was calculating overtime on the semi-annual bonus it was paying to its hourly employees. The bonus was paid each April and October to certain long-term employees and was calculated based upon the number of hours the individuals had worked during the six month period preceding the payout date. The maximum semi-annual base bonus amount varied from $2,000 for those with less than ten years of service to $3,500 for those with twenty or more years of service. To qualify for the maximum base bonus, the employee must have been paid for at least 1,000 hours in the six-month period preceding April 1 and October 1. Bonuses were prorated for those paid for less than 1,000 hours; the formula for the base bonus was thus hours paid up to 1,000/1,000 x maximum bonus amount.

Costco calculated the overtime owed on the bonus by dividing the employee’s maximum base bonus by the minimum number of paid hours required to achieve that maximum bonus (1,000). Using that number as the regular hourly bonus rate, Costco then multiplied the number of overtime hours worked during the bonus period by ½ of the regular bonus rate. In other words, Costco calculated overtime in accordance with the DLSE’s formula for production-based bonuses. Plaintiffs contended that the bonus was more akin to a flat sum bonus – such that Costco was required to calculate the regular bonus rate by dividing the base bonus by the number of straight time hours worked during the bonus period, and then multiply the number of overtime hours by 1.5 times the regular bonus rate.

The court concluded that the Costco bonus was a hybrid of the two types of bonuses identified by the DLSE. Because each hour worked up to the first 1,000 hours increased the amount of the bonus, Costco’s bonus functioned as a production bonus until the 1,000 hour threshold was met. As to hours worked after the 1,000 threshold, Costco’s bonus functioned like a flat sum bonus because the additional hours worked did not add to the amount of the bonus. Based on the DLSE’s position on the two types of bonuses, the court concluded that the Costco bonus did not “encourage imposition of overtime during the post-1,000 hour period in a way that would support the use of the DLSE’s flat sum bonus formula.” Accordingly, Costco was justified in using the production-bonus method of overtime calculation.

The court’s decision highlights how complicated it can be to correctly calculate bonus overtime under California law. However, the time and effort needed to get it right is time well spent since an employer that uses the wrong method for calculating bonus overtime is a prime candidate for a class action lawsuit that could lead to significant liability.

This blog entry was written by Marlene Muraco.

The Court held that California’s overtime laws apply to nonresident employees for those periods of time that the employees worked in California. The Court reasoned that California clearly intended its labor laws to apply to work done in California by nonresidents. 

The Court rejected the employer’s due process arguments, reasoning that the company had a sufficient presence in the state such that it could be required to comply with California law. The Court noted that principles of due process require “significant contact or significant aggregation of contacts, creating state interests, such that choice of its law is neither arbitrary nor fundamentally unfair.” In this case, the Court held that the employer had sufficient contacts with California (including that its headquarters and principal place of business were in California).

The one bright spot for employers was the Court’s holding that California’s Unfair Competition Law did not apply to acts based on alleged federal wage law violations that occur outside of the state.

Following the Court’s decision, multi-state employers who conduct business in California will have to determine whether they have a sufficient presence in California to require them to comply with that state’s Labor Code with respect to nonresidents who temporarily work in the state. Since California law is considerably more strict than federal law and the law of most other states with regard to the classification of employees as exempt or nonexempt, the right to receive daily overtime, and the provision of meal and rest breaks, among other things, the Sullivan decision could prove to be an administrative burden for employers whose employees are assigned to work on a temporary basis in California.

UPDATE: Following this decision, both parties submitted Petitions for Rehearing En Banc to the Ninth Circuit.  On December 5, 2008, the Court ordered both parties to file a response to the other’s Petition. 

Tami Falkenstein-Hennick authored this blog entry.