5 considerations for California employers who manage bonuses – jobs & hr

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July 15, 2021, at
Ferra Hotel vs. Loews Hollywood, SARL, the California Supreme Court enacted a new rule requiring that bonuses for violations of meals, rest and recovery breaks be paid at the regular rate of pay.

Numerous California wage and hours class actions and Private Attorneys General Act (PAGA) class actions include allegations that employers did not properly pay premiums and did not calculate them using the premium rate. normal pay, especially for overtime, sick leave, and now, under Ferré, for meal, rest and recovery break premiums.

To help mitigate the growing risks associated with premium payments, California employers may want to consider the following when managing their premium programs.

1. Define bonuses as discretionary or non-discretionary

An employer may consider writing a statement describing whether a bonus is discretionary and therefore may be excluded from the regular rate of pay, or non-discretionary, and therefore should be included in the calculation of the regular rate.

According to the California Division of Labor Standards Enforcement (DLSE) Policy and Interpretations Manual, discretionary bonuses to be excluded from compensation are those paid “in the form of gifts given on Christmas or other special occasions, as a reward for services rendered. , the amounts of which are not measured by or do not depend on hours worked, production or efficiency. “

Other exclusions may also apply.

Non-discretionary bonuses include payments that serve to incentivize employees to increase their productivity or stay employed with the company until a specific date. These bonuses must be included in the regular rate of pay.

2. Establish criteria for non-discretionary bonuses

For non-discretionary bonuses, an employer may consider drafting another text clearly describing the nature and purpose of the bonus. Such a description is useful because, when it comes to incorporating bonuses into the regular rate of pay, the type of bonus can make a big difference in whether and how it is included in the regular rate of pay.

A productivity bonus generally rewards an employee based on the productivity, quality or efficiency of their work. Clearly established goals can help the employee better understand what goals need to be accomplished to earn the bonus.

Employers may also consider including provisions covering employee eligibility if an employee resigns or is fired for cause during the bonus period, or if the employee may receive a pro-rated payment if they leave their job. during the bonus period.

Additionally, an employer may wish to refrain from changing the bonus criteria during the bonus period or from including forfeiture provisions that would require an employee to forfeit an earned bonus if the employee resigns to work for a job. competitor. The employer can also designate the period covered by the premium, including whether it covers the same week, or a longer period such as a month, quarter or year.

In contrast, a flat-rate premium does not vary in amount or increase in any way with productivity or hours worked. In 2018, the California Supreme Court in Alvarado v. Dart Container Corporation of California found that a lump sum attendance bonus of $ 15, which employees received when they worked weekend shifts and which did not increase with the number of hours worked in the shift, was a lump sum premium.

The flat-rate premium must be calculated in the regular rate at a multiple greater than a productivity premium. Thus, employers may consider basing lump sum bonuses more directly on productivity.

In this scenario, the lump sum bonuses would vary based on productivity and hours worked. For a percentage-based bonus, the employer would grant a bonus calculated as a percentage of an employee’s total salary (regular salary plus overtime pay).

This type of bonus increases both the employee’s regular rate of pay and overtime pay by the same percentage. Thus, the company is not required to recalculate the regular rate of pay for overtime purposes.

3. Training payroll teams on regular rate of pay requirements

Even though payroll providers are responsible for calculating overtime pay, an employer may consider training their payroll team on how to properly calculate regular productivity rates and lump sum bonuses.

Documenting these diligent and good faith efforts can be useful when defending California Labor Code section 203 claims, which require willful violations, and may warrant discretionary reductions in PAGA penalties by the courts. .

Productivity bonus

Federal and California laws provide a formula for calculating overtime premiums due for the payment of productivity premiums. The amount of the bonus is added to the employee’s other income, except for legal exclusions, and the total earned is then divided by the total hours worked during the same work week. The employee shall receive additional pay for each work week he worked overtime at the rate of one and a half times the hourly rate multiplied by the number of overtime hours worked during that week.

Flat-rate bonuses

In the Alvarado decision, the California High Court held that non-discretionary lump sum bonuses should be divided only by the hours worked at the regular rate, then multiplied by one and a half (or two in the case of double time) to determine the bonuses. ‘overtime. For example, the overtime adjustment owed on flat-rate premiums in California is three times that of the productivity premium formula.

4. Review of regular rate of pay calculations

An employer may also consider appointing a payroll professional to regularly review the inclusion of bonuses in regular rate of pay calculations. The exam may include the following:

  • whether bonuses were correctly included in overtime pay, in particular monthly, quarterly or annual bonuses that required retroactive “adjustment” payments;
  • whether the premiums have been correctly included in the normal sick leave rate; and
  • whether the premiums have been correctly included in the regular rate for premium payments for meals, rest and recovery breaks.

5. Consider retroactive “adjustment” payments for meal, rest and recovery break premiums

In Ferra vs. Loews, the California Supreme Court ruled that its decision was retroactive. For example, employers may consider calculating and remitting regular rate adjustment payments for all premiums paid in the previous three years.

Following the recent Ferré decision, the California Supreme Court is currently considering Naranjo v. Spectrum Security Services Inc., in which the court will determine whether the bonus payments are also considered wages.

While bonuses are also considered wages that must be paid at the regular rate of pay, failure to correctly calculate and pay the regular bonus rate can also result in an additional final payment and penalties on the salary statement.

As such, the time may have come for employers to revisit their policies for regular bonuses and rates of pay.

A version of this article was previously published inLaw 360.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

About Yvonne Lozier

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