Profit sharing bonus properly excluded from regular rate

GEICO properly excluded a profit sharing bonus in the calculation of an employee’s regular rate for overtime purposes, ruled a federal district court in California in dismissing the employee’s overtime pay claims. As part of the clerical employee’s compensation, she received an annual bonus through a profit sharing plan. Generally, discretionary bonuses made pursuant to profit-sharing plans fall under excludable payments. Moreover, GEICO’s requirement that the employee remain employed until the payout date did not change that conclusion. Finding that GEICO’s profit sharing bonus was based on a percentage of earnings from the previous calendar year, the court concluded that it was properly excluded from the employee’s regular rate of pay.
A former nonexempt clerical worker for GEICO brought individual and collective action claims for FLSA overtime violations, as well as California labor law and PAGA claims. Specifically, the employee alleged GEICO retained overtime wages and other benefits. During her employment, the employee was at times required to work overtime hours in excess of eight hours per workday and/or 40 hours per week. She received compensation in two forms: (1) an hourly wage, and (2) an annual bonus under a profit sharing plan.

Profit sharing bonus

The employer’s contributions to the profit sharing plan come from each calendar year’s net profits, and the contribution amount is set by the company’s board of directors in its sole discretion. The employer then allocates funds to each of its “planning centers” based on rankings determined by a numerical value assigned to each planning center. Bonuses are apportioned to each eligible employee within a planning center.
The employee’s earnings in the apportionment included all regular pay, overtime pay, and shift differential earned during the plan year, and all bonuses earned during the plan year, except the profit sharing payments themselves. In order to receive the profit sharing bonus, an employee was “required to remain employed until the payout date of the bonus.”
According to the employee, GEICO’s administration of its compensation mechanisms was legally flawed, so that it failed to pay overtime wages under California law, failed to timely pay wages for all hours worked, and violated the overtime provisions of the FLSA, among other claims. The employee’ complaint was originally filed in state court. After GEICO removed the action to federal court, it filed this motion to dismiss.

Calculation of regular rate

GEICO argued that the employee’s claims should be dismissed because the profit sharing bonus was “paid as a percentage of both overtime and regular wages,” and therefore, she had already been paid all wages owed her. The employer argued that it properly excluded the profit sharing bonus when calculating the employee’s regular rate of pay.
The threshold issue was whether GEICO was required to include the profit sharing bonus when calculating the employee’s regular rate of pay to determine overtime wages. This issue turned in large part on the distinction between percentage bonuses as defined by 29 C.F.R. § 778.210 as distinguished by Section 778.503, and discretionary bonuses as defined by Section 778.211. Generally, discretionary bonuses made pursuant to profit-sharing plans fall under excludable payments. However, discretionary bonuses that “are announced to employees to induce them to remain with the firm” and “are contingent upon the employee’s continuing employment until the time the payment is made” “must be included in the regular rate of pay.”
The employee argued that when GEICO calculated her regular rate of pay to determine overtime pay, it violated Section 778.211 by improperly excluding the profit sharing bonus. However, GEICO argued that Section 778.211 does not apply to percentage bonuses, and a percentage bonus under Section 778.210 is valid regardless of whether it is contingent upon an employee’s continuing employment.

Percentage bonus

The court next addressed whether GEICO’s administration of its profit sharing bonus was properly excluded when calculating the employee’s regular rate of pay pursuant to controlling federal regulations. First, the court noted that the employee cited no authority for her interpretation of a 1985 DOL opinion letter’s requirements for a valid percentage bonus under Sections 778.210 and 778.510. Here, the court concluded that an otherwise-valid percentage bonus is not rendered invalid merely due to a contingency. GEICO’s bonus was paid as a percentage of the employee’s straight-time and overtime wages earned during the previous calendar year. Therefore, the requirement that eligible employees remaining employed through the payout date to receive the bonus did not disqualify it as a bona fide percentage bonus under Sections 778.210 and 778.510.
Next, the employee argued that the bonus should be disqualified as a percentage bonus because it was “used to reward future performance and save the employer money” and “bonus plans containing these additional purposes and conditions do not qualify for exclusion from the regular rate.” However, the court found that the employee’s purpose-and-effect argument hinged on a flawed premise. Thus, the court again concluded that the bonus was not disqualified from being a true percentage bonus merely due to contingency or lack of notice.

Policy argument

Finally, the employee made a policy argument that “GEICO’s interpretation of the requirements for a percentage bonus allows all sorts of duplicitous payment structures under the guise of payment on a percentage of income.” Here, the court found that her hypotheticals only highlighted her misinterpretation of Sections 778.210 and 778.510.Thus, the court concluded that on the facts presented, GEICO’s profit sharing bonus was a proper percentage bonus under Sections 778.210. Its requirement that the employee remain employed until the payout date did not change that conclusion. (Russell v. Government Employees Insurance Company, DC Calif, 167 LC 36,548.)

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