by Mark I. Schickman

A small difference in wages led to a massively complex opinion about how to calculate overtime compensation into a nondiscretionary bonus, whether to apply state or federal law in the calculation, and whether overtime compensation was being double counted.

Folding Overtime Premiums into Nondiscretionary Bonus Calculations

Stephen Lemm worked for Ecolab, Inc., for several years before becoming a route sales manager for the company beginning April 5, 2018. Ecolab provides sanitation and pest control services and supplies, commercial kitchen equipment and appliance maintenance, and food safety services.

As a route sales manager, Lemm was Ecolab’s primary contact with certain customers. He visited them regularly to install, repair, and maintain Ecolab equipment, provide ongoing training and customer service, and sell Ecolab products and parts.

Route sales managers are nonexempt employees who are entitled to overtime compensation. Lemm regularly worked more than 12 hours a day and more than 40 hours a week in 2018 and 2019. His compensation was calculated under an annual incentive compensation plan. According to the plan, his compensation was comprised of hourly wages and a nondiscretionary monthly bonus. The method of calculating the nondiscretionary bonus is at the heart of this case.

Lemm’s hourly wages, including any overtime or double time wages, were paid every two weeks. Although the bonus is nondiscretionary, the actual amount of the bonus may vary from month to month. Unlike regular wages, the monthly bonus is paid every four to six weeks according to a schedule set out in the incentive compensation plan.

Under the plan’s terms, the monthly bonus depends on Lemm meeting or exceeding two target metrics. The “territory sales budget achievement” factor depended on him achieving at least 80% of his territory sales budget. If he met this goal, his gross wages for the month were increased by at least 22.5%. The greater his sales, the greater the percentage multiplier.

The “service detail reporting with observations” factor required a report on at least 90% of his regular calls each time he visited a customer, for which his gross wages for the month were increased by an additional 5%. Under Ecolab’s calculation, gross wages for the purpose of calculating the bonus included straight time, overtime, and double time wages.

Ecolab Calculation Challenged

Lemm filed a representative Private Attorney General Act (PAGA) suit, alleging that under California law, he and other Ecolab route sales managers failed to receive the proper overtime rate as part of the nondiscretionary monthly bonus. The company denied the claim, asserting it calculated the rate properly under federal law. The major difference between the claimed calculations is whether overtime compensation was due on the monthly bonus by way of a percentage increase, correlating to the straight time and overtime earnings during the bonus period. The parties agreed to “cross motions” in which each of them presented their positions to the trial court, asking for a ruling as a matter of law.

The trial court granted Ecolab’s request and denied Lemm’s. It explained:

Ultimately, [Ecolab’s] position makes logical sense. Simply put, a requirement for an employer to pay overtime on a percentage bonus that already includes overtime pay makes the employer pay ‘overtime on overtime.’ This is not a requirement under the law. By 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 appealed.

The court of appeal agreed that Ecolab’s calculation was proper. It found that Lemm’s calculation failed to take into account that the bonus he received already included overtime on the bonus. The company’s calculation thus complies with both federal and California law.

Lemm argued his calculation was adopted by the Department of Labor Standards Enforcement (DLSE) manual. But the court found the DLSE manual only persuasive, not definitive. It wrote, “Having exercised the independent judgment the Supreme Court compels, we are not persuaded Ecolab was required to use the exact formulation presented in the [DLSE manual] example to calculate a percentage-based bonus such as the one Lemm received.”

Though it acknowledged the general rule of construction that favors the protection of employees, the policy doesn’t support “overtime on overtime.” The trial court was affirmed. Stephen Lemm v. Ecolab Inc., B312232 (2nd Appellate District, Division 5, 1/3/23).

Bottom Line

First, we don’t much like nondiscretionary, mandatory commissions or bonuses. They come with a lot of rules, often need to be folded into a base hourly rate, and can often block needed, legitimate business discretion to respond to circumstances. Discretion must be exercised in good faith, but it’s an important tool to have.

Make sure your commission or bonus plans are well thought out, clear, and in writing (with a written receipt from each affected employee). As this case points out, leaving performance criteria aside, even getting the calculation correct is not without difficulty.

Mark I. Schickman is the founder of Schickman Law in Berkeley, California. Mark has successfully litigated almost every type of employment case in the courts before juries and administrative agencies and on appeal and is a popular and engaging trainer providing employment advice to employers across the country. He can be reached at Mark@SchickmanLaw.com.