Lemm v. Ecolab Inc.

87 Cal.App.5th 159

303 Cal.Rptr.3d 364

Stephen LEMM, Plaintiff and Appellant,

v.ECOLAB INC., Defendant and Respondent.

B312232

Court of Appeal, Second District, Division 5, California.

Filed January 3, 2023

Hathaway, Perrett, Webster, Powers, Chrisman & Gutierrez, Alejandro P. Gutierrez, Ventura, The Hathaway Law Firm; Palay Hefelfinger, Daniel J. Palay and Brian D. Hefelfinger for Plaintiff and Appellant.

Jones Day, Kelsey A. Israel-Trummel, San Francisco, Michael J. Gray and Ann-Marie Woods for Defendant and Respondent.

RUBIN, P. J.

Stephen Lemm appeals from a judgment in favor of his employer, Ecolab, Inc. Lemm sued Ecolab under the Private Attorneys General Act (PAGA; Lab. Code, § 2698 et seq. ) alleging Ecolab improperly calculated the overtime due on a nondiscretionary bonus paid to Lemm and other similarly situated employees. Ecolab successfully moved for summary judgment on the ground its formulation of the overtime payment comported with the Fair Labor Standards Act of 1938 (FLSA). On appeal, Lemm argues California authorities require a different method of calculation and supersede federal authority in this instance because California provides greater protection to employees like him. We affirm.

FACTS

After working for Ecolab for several years, Lemm became a route sales manager for the company beginning April 5, 2018. Ecolab provides to its customers, among other things, sanitation and pest control services and supplies, commercial kitchen equipment and appliance maintenance, and food safety services. As a route sales manager, Lemm was Ecolab's primary contact with certain customers. He visited these customers regularly to install, repair, and maintain Ecolab equipment, provide ongoing training and customer service, and sell Ecolab products and parts.

1. Compensation for Route Sales Managers

Route sales managers are nonexempt employees who are entitled to overtime compensation. Lemm regularly worked more than 12 hours a day and more than 40 hours a week in 2018 and 2019.

Lemm's compensation was calculated pursuant to an annual Incentive Compensation Plan. Under the plan, his compensation was comprised of hourly wages and a nondiscretionary monthly bonus. The method of calculating the nondiscretionary bonus is at the heart of this appeal.

Lemm's hourly wages, including any overtime or double time wages, were paid every two weeks. The overtime and double time hours were determined by state and federal guidelines and are not in dispute to the extent those hours do not comprise part of the calculation of the monthly bonus.

The monthly bonus is nondiscretionary, meaning the employee is entitled to it under his or her compensation package whenever the employee meets target metrics. We describe the target metrics below.

Although the bonus is nondiscretionary, the actual amount of the bonus may vary from month to month based on the factors that are considered in the calculation of the bonus pursuant to the employee's compensation plan. Unlike regular wages, the monthly bonus is paid every four to six weeks pursuant to a schedule set out in the Incentive Compensation Plan. For 2018 and 2019, the period at issue, Lemm's Incentive Compensation Plan described the monthly bonus as follows:

"A monthly bonus is calculated on the following payout factors, based on net sales after distributor sales adjustments and product returns:

• Territory Sales Budget Achievement

• Service Detail Reporting with Observations

"Monthly bonus is earned after completion of the following:

• Direct sales are billed by the credit department

• Receipt of reporting from the Distributor Sales

• Items sold or shipped to the customer have not been returned within three (3) months of the initial order (see Policy – Returns)

• Calculation and approval of the bonus advance by the Company"

Under the plan's terms, the monthly bonus depends on Lemm meeting or exceeding the two target metrics – sometimes referred to as "payout factors" – which we list above in the indented portion of the text: (1) Territory Sales Budget Achievement and (2) Service Detail Reporting with Observations. The "Territory Sales Budget Achievement" factor depended on Lemm achieving at least 80 percent of his territory sales budget. If he met this goal, his gross wages for the month were increased by at least 22.5 percent. The greater his sales, the greater the percentage multiplier.

The "Service Detail Reporting with Observations" factor depended on Lemm completing a report on at least 90 percent of his regular customer calls. The service detail report documented Lemm's efforts to sell Ecolab services and products each time he visited a customer. If he met this goal, his gross wages for the month were increased by an additional 5 percent. Unlike the Territory Sales Budget Achievement factor, this percentage did not change even if Lemm completed reports on more than 90 percent of his regular customer calls.

Under Ecolab's calculation, gross wages for the purpose of calculating the bonus included straight time, overtime, and double time wages.

2. The Lawsuit

On March 25, 2019, Lemm served a PAGA notice of various Labor Code violations on the Labor and Workforce Development Agency (the agency) and Ecolab. The agency did not take action on Lemm's claim, allowing Lemm to file suit against Ecolab.¹

On June 19, 2019, Lemm brought his representative PAGA suit, alleging he and other Ecolab route sales managers failed to receive the proper overtime rate as part of the nondiscretionary monthly bonus. Lemm did not assert an individual cause of action.

On July 25, 2019, Ecolab answered and denied Lemm's allegations. About two months later, on October 2, 2019, Lemm served an amended PAGA notice on the agency, asserting additional claims for "civil penalties associated with the failure of Ecolab to pay all required wages, including reporting time and split shift wages, during the employment."

The parties stipulated to the filing of cross-summary adjudication motions to resolve how overtime rates are treated in the calculation of the monthly bonus. The parties agreed the summary adjudication motions would not resolve the issues raised by Lemm's amended PAGA notice seeking penalties for reporting time and split shift wages. Ecolab took the position that Lemm's amended PAGA filing was not adequately or timely asserted but agreed it would be more efficient to decide the overtime issue first. The trial court granted the parties’ request and agreed to adjudicate whether "the manner in which Ecolab calculated and paid Plaintiff his Monthly Bonuses [was] a lawful method to calculate and pay overtime and double time compensation owed on the Monthly Bonuses under California law."

3. Summary Adjudication

In their cross-motions for summary adjudication, the parties did not dispute that overtime and double time compensation was due on the nondiscretionary bonus. They differed on which method to use to calculate the overtime due on the bonus.

In his motion for summary adjudication, Lemm argued that under California law, nondiscretionary bonus payments must be incorporated into the regular rate of pay, which in turn would affect any overtime calculations. Lemm relied on the formula presented in section 49.2.4 (section 49.2.4) of the Division of Labor Standards Enforcement Manual (DLSE Manual) for his formulation. We set out the formula below.² Lemm argued the California Supreme Court opinion in Alvarado v. Dart Container Corp. of California (2018) 4 Cal.5th 542, 229 Cal.Rptr.3d 347, 411 P.3d 528 ( Alvarado ) compelled the court to adopt section 49.2.4's formula because it was more favorable to employees.

Ecolab relied on federal law, specifically 29 C.F.R. section 778.210 (CFR 778.210), for its method of calculating the overtime due on the monthly bonus. It argued CFR 778.210 applies to what are known as percentage bonuses, which are paid as a percentage of gross earnings that have already incorporated straight time, overtime, and double time wages for each bonus period.

The trial court granted Ecolab's motion and denied Lemm's, finding Alvarado's holding was limited to flat sum attendance bonuses, not percentage bonuses, and federal law was not at odds with California authorities. It explained, "Ultimately, [Ecolab's] position makes logical sense. Simply put, a requirement for an employer to pay overtime on a percentage bonus that already includes overtime pay makes the employer pay ‘overtime on overtime.’ This is not a requirement under the law. By paying a bonus based on a percentage of gross earnings that includes overtime payments the employer automatically pays overtime simultaneously on the bonus amount. ( Russell [v. Government Employees Ins. Co. (9th Cir. 2019)] 787 Fed. Appx [953,] 954 [a percentage of total earnings bonus ‘serves as both a bonus and a simultaneous payment of overtime compensation due on the bonus’].)"

4. Judgment on the Pleadings

After the trial court's summary adjudication ruling, Ecolab filed a motion for judgment on the pleadings on Lemm's amended PAGA claim for reporting time and split shift wage violations. Ecolab pointed out that Lemm's complaint did not include these particular Labor Code violations. More significantly, Lemm could not amend his complaint to include the new PAGA claims because he had failed to exhaust his administrative remedies, having served the amended PAGA notice on the agency after the lawsuit had already been filed.³

Lemm opposed the motion for judgment on the pleadings. He asserted the allegations in his complaint encompassed the same Labor Code violations as asserted in the amended PAGA notice since the complaint generally alleged a failure to pay wages owed. Further, Ecolab was on notice of the reporting time and split shift wage violations. Lemm alternatively sought to amend the complaint to include reporting time and split shift violations.

The trial court granted judgment on the pleadings, finding the complaint was devoid of facts sufficient to state causes of...