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Marin v. Costco Wholesale Corp.

December 23, 2008; as modified January 21, 2009

ANTHONY MARIN ET AL., PLAINTIFFS AND APPELLANTS,
v.
COSTCO WHOLESALE CORPORATION, DEFENDANT AND APPELLANT.
ANTHONY MARIN ET AL., PLAINTIFFS AND RESPONDENTS,
v.
COSTCO WHOLESALE CORPORATION, DEFENDANT AND APPELLANT.



(Alameda County Super. Ct. No. RG04150447). TRIAL JUDGE: Honorable Ronald M. Sabraw.

The opinion of the court was delivered by: Marchiano, P.J.

CERTIFIED FOR PUBLICATION

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 defendant's 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. We conclude that defendant's formula violates neither California nor federal law, and reverse the judgment with directions to enter judgment for defendant.

I. BACKGROUND

A. The Base Bonus

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.*fn1 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 × maximum bonus amount.

B. Overtime on the Bonus

Under California law, plaintiffs are entitled to "no less than one and one-half times the regular rate of pay" for work in excess of eight hours in one workday. (Lab. Code, § 510, subd. (a); Cal. Code Regs., tit. 8, § 11070, subd. (3)(A)(1)(a) [Wage Order 7-2001].)*fn2 In this respect, California law is more protective of workers than the federal "fluctuating workweek" law, which requires one and one-half time overtime compensation only after an employee works more than 40 hours in a workweek. (See Skyline Homes, Inc v. Department of Industrial Relations (1985) 165 Cal.App.3d 239 247-248 (Skyline) [contrasting the fluctuating workweek standard and California's eight-hour day limitation]; see generally Morillion v. Royal Packing Co. (2000) 22 Cal.4th 575, 592 (Morillion) [state law may afford employees greater protection]; 29 U.S.C. § 218(a) [same].)

Because the non-discretionary 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. The federal regulation on the subject addresses weekly rather than daily overtime, but usefully explains the need for additional, retroactive overtime pay upon receipt of a bonus earned over an extended period of time:

"General rules. 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 a 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).)

C. The Parties' Competing Formulas

Defendant calculated the overtime owed on the bonus by dividing the employee's maximum base bonus by the minimum number of paid hours required to achieve that maximum bonus (1,000) to determine a regular hourly bonus rate, and then by multiplying the number of overtime hours worked during the bonus period by one-half of that regular bonus rate. Plaintiffs contend that defendant was required to calculate the regular bonus rate by dividing the base bonus the employee earned by the number of straight time hours worked during the bonus period, and then multiply the number of overtime hours by 1.5 times that regular bonus rate.

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) × 100 (overtime hours) × 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) × 100 (overtime hours) × 1.5 = $447.

D. Trial Court Proceedings

The case commenced in April 2004 with the filing of a complaint by plaintiff Anthony Marin, an hourly employee of defendant from October 1989 to February 2004, alleging Labor Code violations and unfair business practices (Bus. & Prof. Code, § 17200). The first amended complaint filed in June 2004 identified the class as hourly employees of defendant who were eligible for the bonus on or after four years prior to the filing of the suit. The parties filed motions for summary judgment or summary adjudication, which were denied in December 2004.

Based on calculations that need not be reproduced here, the court concluded that defendant's bonus plan complied with California law when an employee worked less than 1,000 hours in a bonus period. In that situation, the "hourly [overtime] rate of pay" under defendant's formula was consistently 1.5 times the regular rate of pay, while plaintiffs' formula improperly counted overtime "once in the calculation of the [base bonus] and again in the calculation of [overtime on the bonus]." The court found that defendant's plan violated California law when an employee worked more than 1,000 hours because defendant's formula paid the employee "for only 1/3 of the bonus overtime due" on hours worked beyond 1,000. However, the court was not persuaded at that point that plaintiffs' formula was correct because it produced an "[overtime] rate that fluctuates with the amount of hours worked."

Defendant then moved for summary judgment or adjudication on the ground that Marin had never worked more than 1,000 hours in any relevant bonus period. In response, Marin noted that bonuses are awarded under defendant's plan based on hours paid, including vacation and sick time, as well as hours worked, and asserted that he had reached the 1,000 paid hours threshold in some bonus periods. The court granted summary adjudication against Marin on all causes of action on the ground that he had not worked more than 1,000 hours in a bonus period, but granted his request to add a new plaintiff who had standing to prosecute the claims he alleged. Marin was granted leave to file a second amended complaint that added three new named plaintiffs, and changed the class definitions to encompass a "Subclass A" confined to hourly employees who had worked more than 1,000 hours in a bonus period, and a "Subclass B" confined to those who had been paid for more than 1,000 hours in a bonus period even though they worked less than 1,000 hours in the period. The Subclass B definition was later amended by the court to simply include those paid for more than 1,000 hours in a bonus period. Plaintiffs then moved for summary judgment or adjudication, and defendant moved for summary adjudication of the Subclass B claims; defendant did not dispute that it was liable to Subclass A under the court's December 2004 ruling.

In its ruling on the motions, the court concluded that use of plaintiffs' formula to compute the bonus overtime owed to both subclasses was compelled by the decision in Skyline, supra, 165 Cal.App.3d 239, and sections of the Division of Labor Standards Enforcement's (DLSE) 2002 Enforcement Policies and Interpretations Manual (Manual) distinguishing "flat sum" bonuses (Manual § 49.2.4.2) from bonuses "based on a percentage of production or some formula other than a flat amount" (Manual § 49.2.4). The court provided calculations showing that overtime on the bonus increased under both sides' formulas as the amount of overtime work increased, and that the increases were larger under plaintiffs' formula.*fn3

The court conceded that its conclusion yielded "what might appear to be irrational results. For example, two employees who work different amount[s] of straight time work but the same amount of overtime will have different hourly rates for purposes of calculating overtime and must be paid different amounts of overtime pay." However, the court felt it could not "presume[] a consistent and rational world," and "simply applie[d] California law as it [found] it."

The court granted both subclasses summary adjudication on the issue of liability on causes of action concerning the correct formula, and on the cause of action under the unfair competition law. It granted defendant summary adjudication on a cause of action for waiting time penalties, observing that " '[t]he law is sparse regarding how an employer is to calculate overtime when awarding bonuses,' " and finding that, " 'given the paucity of California authority in this area and contrary Federal authority, there are substantial grounds for differences of opinion.' "

The parties filed a joint statement setting forth their positions on issues of damages and injunctive relief. The parties agreed that, under the court's prior rulings, the regular rate for both subclasses would be determined by dividing the maximum base bonus by the number of straight time hours worked, but disagreed as to the overtime hours by which the regular rate would be multiplied. Plaintiffs argued that all overtime hours worked during the bonus period should be counted; defendant argued that only the overtime hours worked up to the 1,000 paid hours threshold should be used.

The court entered judgment requiring defendant to pay bonus overtime according to plaintiffs' formula, but only on the overtime hours worked up to the 1,000 paid hours threshold. The judgment awarded prejudgment interest for amounts owed from four years before the suit was filed. The money judgment for plaintiffs totaled $5,303,656.

E. Appeals

Defendant has appealed, and plaintiffs have cross-appealed, from the judgment (A116847). Defendant has also appealed from the subsequent order granting plaintiffs' motion for attorney fees and costs (A118116). The appeals have been consolidated for briefing and decision. Defendant advances no argument on the merits of the ...


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