This case concerns the lawfulness of defendant Costco Wholesale Corporation’s formula for computing overtime compensation on semi-annual bonuses paid to hourly employees. The trial court determined that defendants’ bonus overtime formula for the class of employees who qualify for the maximum base bonus (plaintiffs) violates California law, and ordered use of a different formula. The court concluded that defendant’s formula violated neither California nor federal law, and reversed the judgment with directions to enter judgment for defendant.
a. The Base Bonus.
Costco pays a formula-based 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 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.
b. Overtime on the Bonus.
The Court said the general rule is that “where a bonus payment is considered a part of the regular rate at which an employee is employed, it must be included in computing his regular hourly rate of pay and overtime compensation. No difficulty arises in computing overtime compensation if the bonus covers only one weekly pay period. The amount of the bonus is merely added to the other earnings of the employee (except statutory exclusions) and the total divided by total hours worked. Under many bonus plans, however, calculations of the bonus may necessarily be deferred over a period of time longer than workweek. In such a case the employer may disregard the bonus in computing the regular hourly rate until such time as the amount of the bonus can be ascertained. Until that is done he may pay compensation for overtime at one and one-half times the hourly rate paid [to] the employee, exclusive of the bonus. When the amount of the bonus can be ascertained, it must be apportioned back over the workweeks of the period during which it may be said to have been earned. The employee must then receive an additional amount of compensation for each workweek that he worked overtime during the period equal to one-half of the hourly rate of pay allocable to the bonus for that week multiplied by the number of statutory overtime hours worked during the week.” (29 C.F.R. §778.209(a) (2008))
The Costco decision involves a lengthy discussion and mathematical analysis of Costco’s bonus plan. The main message from the case is that the method for calculating the amount of “bonus overtime” depends on whether the bonus is characterized as a “flat sum” bonus or a “production” bonus. The two formulas for calculating the overtime due under each type of bonus is summarized below.
Pursuant to the DLSE, if the bonus is a flat sum (such as $300 for continuing to the end of the season, or $5.00 for each day worked) the regular bonus is determined by dividing the bonus by the maximum legal regular hours worked during the period to which the bonus applies.* Section 49.2.4.3 of the DLSE Manual provides a sample “flat sum” bonus calculation for a $300.00 bonus “for remaining to the end of the season paid to a pieceworker who worked 640 regular hours, 116 time and one-half overtime hours and 12 double time hours:
| Bonus | $300.00 |
| Regular Bonus Rate = $300.00 divided by 640 | $ 0.469 |
| [1.5] x regular bonus rate = [1.5] x $0.469 | $ 0.703 |
| Double regular bonus rate = 2 x $0.469 | $ 0.938 |
| Overtime due on bonus for time and one-half hours = $0.703 x 116 | $81.56 |
| Overtime due on bonus for double time hours = $0.938 x 12 | $11.25 |
| Bonus | $300.00 |
| Overtime on bonus | $92.81 |
| Total due on bonus | $392.81 |
Pursuant to the DLSE, if a bonus is based on a percentage of production or some formula other than a flat amount, the regular bonus rate is found by dividing the bonus by the total hours worked during the period to which the bonus applies. The total hours for this purpose will be all hours, including overtime hours. Section 49.2.4.1 of the DLSE Manual provides the following example:
| Regular hourly rate of pay | $ 10.00 |
| Total hours worked in workweek = 52 | |
| Total overtime hours at time and one-half = 12 | |
| Overtime due on regular hourly rate = 12 x $15.00 | $180.00 |
| Bonus attributable to the workweek | $138.00 |
| Regular bonus rate = $138.00 ÷ 52 = $2.6538 ÷ 2 = $1.33 x Overtime Hours |
$ 15.92 |
| Total earnings due for the workweek: | |
| Straight time: 40 hours at $10.00 | $400.00 |
| Overtime: 12 hours at $15.00 | $180.00 |
| Bonus | $138.00 |
| Overtime on Bonus | $15.92 |
| Total | $733.92 |
*It is important to note that the Costco court agreed with Costco that the “flat sum” bonus overtime calculation in section 49.2.4.2 of the DLSE Enforcement Manual may be unenforceable as a void regulation.