Monday, February 23, 2009

Why the Supreme Court Should Define "Bonus" - An Amicus Letter to the California Supreme Court

Today, Bryan Schwartz Law sent the following letter to the California Supreme Court on behalf of the California Employment Lawyers Association, hoping the Court will accept review of the Court of Appeal decision in Marin v. Costco. Simply put, the issue is whether employers can avoid paying the full rate of overtime required under California law - time-and-a-half - just by designating some of the an employee's wages earned for hours worked as a "bonus." Understand that I am not talking here about a true production bonus, i.e., a discretionary bonus for extraordinary performance, but about deferred wages for time spent on the job. The "bonus" in question was not a measure of Costco's generosity, but wages promised to employees which induced them to take the jobs in question - they were basically told their "real" hourly rate of pay was the rate including the "bonus."

February 23, 2009

The Honorable Ronald M. George, Chief Justice
and Associate Justices
California Supreme Court
350 McAllister Street
San Francisco, CA 94102

Re: Amicus Curiae Letter (Rule 8.500(g))
Marin, et al. v. Costco Wholesale Corp. (2009) 169 Cal.App.4th 804, 87 Cal.Rptr.3d 161
California Court of Appeal, First District, Division 1, No. RG04150447

Dear Chief Justice and Associate Justices:

This is a letter under Rule 8.500(g) of the 2009 California Rules of Court in support of the petition for review by Plaintiffs/Respondents/Cross-Appellants in Marin, et al., v. Costco Wholesale Corp. (2009) 169 Cal.App.4th 804, 87 Cal.Rptr.3d 161, California Court of Appeal, First District, Division 1, No. RG04150447 (hereafter, Marin). This letter, on behalf of the California Employment Lawyers Association (CELA), asserts that the Court of Appeal’s decision in Marin dangerously defines the term “bonus” in a manner that would lead employers where this Court did not intend them to go, when discussing incentive compensation in Prachasaisoradej v. Ralphs Grocery Co., Inc. (2007) 42 Cal.4th 217, 64 Cal.Rptr.3d 407. Broadly, the Court of Appeal allows employers to construe as a “bonus” promised compensation for time worked, as opposed to extra compensation for superior performance, i.e., for “extraordinary work,” as bonus is defined by the Department of Labor Standards Enforcement (“DLSE”) in, inter alia, the DLSE Enforcement Manual §2.5.5.

The result of the Court of Appeal’s expansive use of the “bonus” concept is that employers can construe much of employees’ non-discretionary wages as “bonuses,” and thereby avoid including such wages in employees’ regular rate of pay, for overtime compensation purposes. In Prachasaisoradej, this Court specifically refrained from deciding whether amounts paid out under the employer’s incentive compensation plan qualified for exclusion from employees’ regular pay. Id., 42 Cal.4th at 242 n. 14. Here, because the Court of Appeal has allowed Costco to pay only half-time overtime compensation on the non-discretionary, so-called “bonus” wages, rather than time-and-a-half, this Court should define what sorts of bonuses fall outside Labor Code §510. Though the Marin decision professes to be couched in DLSE guidance, the DLSE’s guidance is confused, and this Court should outline a clear test of what is, and is not, true bonus compensation upon which full overtime wages need not be paid.

I. Interest of Amicus

The undersigned writes on behalf of CELA, a “person” within the meaning of Rule 8.500(g), seeking to support the petition for review. CELA is a statewide non-profit organization dedicated to protecting workers’ rights. CELA’s member attorneys represent employees in all types of employment cases in state and federal courts and before administrative agencies, including employment discrimination, wrongful discharge, wage and hour, and unemployment insurance matters. In each of these substantive areas of law, CELA’s members and their clients challenge employers who fail to adhere to California and federal employment laws. CELA frequently appears as amicus curiae in matters before this Court, including, e.g., recent appearances in Murphy v. Kenneth Cole Productions, Inc. (2007) 40 Cal.4th 1094, 56 Cal.Rptr.3d 880, and in Gentry v. Superior Court (2007) 42 Cal.4th 443, 64 Cal.Rptr.3d 773.

CELA’s members have an abiding interest in the definition of workers’ “bonuses,” directly at issue in this case, and in the application of the DLSE’s Enforcement Manual. In particular, CELA seeks to ensure that the term “bonus” is not abused so as to undermine the guarantee of overtime pay in Labor Code §510, and that the State’s wage and hour laws are “liberally construed with an eye to promoting [worker] protection,” as this Court required in Prachasaisoradej, 42 Cal.4th at 246. This Court should not permit an interpretation, like that applied in Marin, which results or could result in denied time-and-a-half overtime pay for millions of California hourly workers.

II. Review is Warranted

It is a basic principle of California employment law that a promised bonus amounts to a unilateral contract which cannot be revoked after performance by the employee has begun. Lucien v. Allstate Trucking (1981) 116 Cal.App.3d 972, 171 Cal.Rptr. 262. By contrast, in Prachasaisoradej, this Court distinguished Truelove v. Northeast Capital & Advisory, Inc. (2000) 95 N.Y.2d 220, 715 N.Y.S.2d 366, 738 N.E.2d 770, in which the New York Court of Appeals held to be non-wages a bonus offered, in addition to the employee's regular remuneration, as a “[d]iscretionary...share in a reward to all employees for the success of the employer's entrepreneurship.” Prachasaisoradej, 42 Cal.4th at 244 n. 15. The Truelove scenario is opposite from that in the instant case, which is like Lucien, since Costco has stipulated that the compensation at issue is wages, Costco’s “bonus” wages are non-discretionary, and they have no relationship whatsoever to the employee’s or the employer’s success.[1]

Under Costco’s plan, any employee who worked the requisite number of hours for the store receives a “bonus” every six months, irrespective of performance.[2] Nonetheless, at the conclusion of each six-month period, Costco’s scheme upheld by the Court of Appeal pays only 0.5 times the bonus pay rate for the overtime hours worked – instead of the 1.5 times the rate of pay, as required for wages under Labor Code §510.[3] Costco’s fancy formulas should not conceal what is happening here: guaranteed pay for overtime hours worked is being short-changed.[4]

As this Court explained in Tidewater Marine Western, Inc. v. Bradshaw (1996) 14 Cal.4th 557, 572-573, 59 Cal.Rptr.2d 186, while disapproving on other grounds Skyline Homes, Inc., v. Dept. of Industrial Relns. (1985) 165 Cal.App.3d 239, 211 Cal.Rptr. 792, California law does not recognize the Federal fluctuating workweek method, which allows payment of 0.5 times the regular rate of pay for overtime under certain circumstances. Tidewater, 14 Cal.4th at 572-573 (discussing Skyline Homes, 165 Cal.App.3d at 253). Yet, while paying lip service to Skyline Homes (Marin, 169 Cal.App.4th at 807), the Court of Appeal here seems to permit overtime calculations in California essentially based on the fluctuating workweek, by permitting a 0.5 multiplier for overtime premiums on the non-discretionary bonus. Id. 165 Cal.App.3d at 808 (using 0.5 multiplier). See also id., 169 Cal.App.4th at 820 (seemingly allowing application of the fluctuating workweek here). The Court of Appeal admitted, but at the same time disregarded, that California law in this area provides more protection to employees than the Federal law. Id. at 807 (citing Morillion v. Royal Packing Co. (2000) 22 Cal.4th 575, 592, 94 Cal.Rptr.2d 3, 995 P.2d 139; 29 U.S.C. § 218(a)). This Court should reject the erosion of California’s stronger standards.

It is time for the Supreme Court to clarify the definition of a bonus falling outside the overtime requirements of Labor Code §510, since the DLSE’s Enforcement Manual’s guidance has apparently led to confusion. There are no fewer than 25 sections of the Enforcement Manual relating to the definition of a bonus required to address this case. See, e.g., DLSE Enforcement Manual 2.5.5,,, 34.1.3, 35.1, 35.2, 35.3, 35.4 35.4.2, 35.4.3, 35.4.4, 35.5, 35.6, 35.7, 49.1.1, 49.1.2,,,,,,, 49.2.4,,,

Indeed, the Court of Appeal apparently became so tangled in the myriad examples and rules of the Enforcement Manual that it missed the basic definition of a bonus – “An addition to salary or wages normally paid for extraordinary work.” (emph. added) DLSE Enforcement Manual 35.1 (citing Duffy Bros. v. Bing & Bing, 217 App.Div. 10, 215 N.Y.S. 755, 758 (1926)). Costco’s bonus, which the Court of Appeal excluded from Labor Code §510’s time-and-one-half computations, has nothing to do with “extraordinary work” at all – it is simply deferred compensation paid for hours worked, and as such, should be included in calculating the regular rate, as describe in DLSE Enforcement Manual Marin’s description of Costco’s “bonus” as primarily a “production bonus” (id., 169 Cal.App.4th at 816) is simply wrong – the employees’ time, not productivity, is the only thing measured by the “bonus,” and as such, they must be treated like all other hourly wages.

III. Conclusion

This Court should not permit courts to follow Marin and to begin allowing employers to characterize non-discretionary wages as production bonuses, so as to avoid payment of overtime wages as defined under Labor Code §510. The petition for review should be granted.

Thank you for your consideration.


/s/ Bryan J. Schwartz
Bryan J. Schwartz, SBN 209903
180 Grand Avenue, Suite 1550
Oakland, CA 94612
Tel. 510-444-9300
Fax 510-444-9301

[1] See Marin, 169 Cal.App.4th at 817 (discussing the requirement to pay overtime on the wages at issue). As the Court of Appeal acknowledged: “Because the nondiscretionary bonus at issue here increases the regular rate of pay, employees who worked overtime during the bonus period and were paid at 1.5 times their hourly rate (unaugmented by the bonus) during that time are entitled to additional overtime pay once the bonus is awarded.” Id. at 807.

[2] The Court of Appeal explained: “Costco pays a formulaic bonus, based on paid hours, to long-term hourly employees. To be eligible for the bonus, paid in April and October, these employees must: (1) have been paid a specified number of hours for continuous service-8,000 hours (approximately four years) for those hired before March 15, 2004, and 9,200 hours (approximately 4.6 years) for those hired after that date; (2) generally be at the top of their pay scale; and (3) have been employed by defendant on April 1 for the April bonus and October 1 for the October bonus. The maximum semi-annual base bonus amount is $2,000 for those with less than 10 years of service, $2,500 for those with 10 to 14 years of service, $3,000 for those with 15 to 19 years of service, and $3,500 for those with 20 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 are prorated for those paid for less than 1,000 hours; the formula for the base bonus is thus: hours paid up to 1,000 / 1,000 x maximum bonus amount.” Marin, 169 Cal.App.4th at 806.

[3] According to the Court of Appeal: “For example, under defendant's formula, an employee who achieves a maximum base bonus of $2,500 by virtue of being paid for 840 straight time hours, 100 overtime hours, and 100 vacation hours during the bonus period is entitled to $125 of overtime pay on the bonus, calculated as follows: $2,500 (maximum base bonus) / 1,000 (paid hours required for maximum base bonus) = $2.50 (regular hourly bonus rate) x 100 (overtime hours) x 0.5 = $125. Under plaintiffs' formula, the same employee would receive $477 overtime on the bonus: $2,500 (base bonus earned) / 840 (straight time hours worked) = $2.98 (regular bonus rate) x 100 (overtime hours) x 1.5 = $447.” Marin, 169 Cal.App.4th at 808.

[4] Costco was not entitled to pay a fixed amount less than the statutory time-and-one-half rate for overtime hours worked. Alcala v. Western Ag Enterprises (1986) 182 Cal.App.3d 546, 550-551, 227 Cal.Rptr. 453.

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