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9th Circuit Holds Bonus Formula Violates Overtime Calculation Rules

by D. Gregory Valenza | | 03/23/2017

The Ninth Circuit decided that a “bonus” formula that deducted from the bonus calculation overtime paid on the base wage was an end-run around the appropriate calculation of the regular rate of pay.  Therefore, the bonus violated the federal Fair Labor Standards Act or FLSA, which means the decision will apply to California overtime cases as well.  The case arose in Oregon, though. 

Cable Communications Inc. compensated its technician workers on a “piece rate” basis. The Company calculated the assigned value of the jobs that the technician performed during the week, and paid the employee that value as the base pay (with a guarantee of at least minimum wage). That formula wasn’t challenged in this case.   So, to calculate overtime on the piece rate base pay, the Company took the total piece rate paid, divided by the total hours worked in the workweek, and then paid the overtime premium of 0.5 times that hourly figure for each overtime hour worked.  That’s the typical “half time” premium due on the base pay, which already covered each of the hours worked.  This is all legal.

But the Company paid on top of the piece rate and overtime a “bonus.” The “bonus” was a formula as follows:  70 * (Piece Rate Total  / 60)  – Piece Rate Overtime on the base amount.  In weeks when there was no overtime worked, the formula for the bonus was 1/6 of the Piece Rate Total.  The employees argued that by reducing the bonus amount by the overtime paid in weeks where overtime was worked, the bonus plan violated the regular rate of pay rules.  The Ninth Circuit agreed:

The employment contract states that during a normal, non-overtime workweek, a technician will receive the total value of the piece-work tasks that he completed—his Piece Rate Total—plus a Production Bonus in the amount of 1/6 his Piece Rate Total. Because the Production Bonus is “a portion of regular wages [that] the [technician] is entitled to receive under his regular wage contract[,]” it is not a true bonus as defined by the Department of Labor (DOL). 29 C.F.R. § 778.502(a) (providing that a bonus is a sum paid in “addition to total wages usually because of extra effort of one kind or another, or as a reward for loyal service or as a gift”). Having agreed that the Piece Rate Total plus 1/6 that amount forms the technician’s normal weekly income, CCI must divide the sum of those amounts by the total number of hours worked in a particular week to properly determine the technician’s regular hourly rate for that week. *** 

But that is not what CCI does during weeks when a technician works overtime. Instead, CCI reduces the Production Bonus paid during a regular forty-hour workweek by the amount of overtime premium that it calculates is due to the technician on his Piece Rate Total. Because a “bonus” of 1/6 the technician’s Piece Rate Total forms part of the technician’s income in a normal, non-overtime week, diminishing or eliminating that “bonus” results in the technician being paid at a reduced hourly rate during weeks when he works overtime. An agreement, practice, or device that lowers the hourly rate during statutory overtime hours or weeks when statutory overtime is worked is expressly prohibited under the regulations promulgated by the DOL interpreting the FLSA.6 The regulations state that “the parties cannot lawfully agree that the rate” that is “applicable to a particular type of work” “shall be lower merely because the work is performed during the statutory overtime hours, or during a week in which statutory overtime is worked.” 29 C.F.R. § 778.316. Similarly, when discussing schemes that establish artificially low regular rates in violation of the FLSA, the DOL cautions “that the hourly rate paid for the identical work during the hours in excess of the applicable maximum hours standard cannot be lower than the rate paid for the non overtime hours nor can the hourly rate vary from week to week inversely with the length of the workweek.” Id. § 778.500(b).

 So, the bonus’s value per hour decreased if the employee worked overtime hours, due to the express inclusion in the bonus formula deducting overtime pay. That, said the Court, violated the rules. 

Query, though, could the company award a bonus for employees who reach their production goals without incurring overtime?  Could the Company award a productivity bonus for achieving a certain productivity rate per hour, but only if they do not work overtime without violating this rule?  I hope so. I think the problem here is that the actual overtime dollars were deducted from the bonus award. As a result, the overtime rate on the bonus plus base wage was artificially lower than it would have been for the same work done by the same employee during the straight time day.  But the case does raise a question about what happens when employers incentivize employees not to work overtime. For now, though, this case addresses reduction of bonuses by overtime pay. 

The opinion goes on to analyze some Oregon state law claims, which I am omitting here.  But you can read all about it in Brunozzi v. Cable Communications, Inc. here. 

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