On February 10, 2011, the California Court of Appeal for the Second District affirmed summary judgment in favor of Costco Wholesale Corporation (Costco), in Head v. Costco Wholesale Corp., case number B222841, finding that Costco properly calculated the regular rate of pay of its salaried, nonexempt ancillary managers.

In 2001, Costco reclassified its ancillary managers from salaried exempt to salaried non-exempt, using a conversion formula to ensure that their incomes would remain the same after the reclassification. Specifically, Costco calculated the managers’ regular rates of pay using their salaries prior to the reclassification, based upon a 40-hour workweek, which resulted in reduced hourly pay rates for the managers. The reduced hourly pay rates were listed on the managers’ wage statements as their regular rates of pay. Costco then calculated new salaries for the managers based on this regular rate of pay, adding as additional compensation an anticipated five hours of overtime pay per week at the premium rate, as such overtime hours were expected of these employees. The revised salaries were listed on Costco’s internal personnel forms as the managers’ reported salaries. After reclassification, an ancillary manager would receive the revised salary for hours worked up to 45, plus overtime compensation for any hours worked beyond 45 per week.

Before the trial court, and again on appeal, the managers contended that Costco’s calculation of their regular rate of pay violated California Labor Code section 515, which requires an employee’s regular hourly rate to be 1/40th of the employee’s weekly salary. Specifically, the managers argued that Costco should have calculated their regular rate of pay based upon what Costco had listed as their “reported salary” on its internal personnel forms, an amount that included the overtime premium pay.

The court of appeal disagreed. Finding for Costco, the court held that Costco’s method of calculating the managers’ regular rate of pay did not violate California’s Labor Code. The court rejected the managers’ argument that Costco was bound by the designation of reported salary on its internal personnel forms, reasoning that after the reclassification, Costco was free to set the managers’ base salaries at any amount, subject to minimum wage laws. Given that the revised managers’ salaries already included an anticipated five hours of overtime per week at the premium rate, the court noted that, “To accept appellants’ position would mean ancillary managers after reclassification would be paid overtime upon overtime.” Although the court’s decision is unpublished, the decision reaffirms the notion that an employer has discretion in setting an employee’s base salary, so long as the salary meets minimum wage requirements. The decision also demonstrates that an employee’s regular rate of pay may be calculated based upon an employee’s weekly salary, and need not include amounts incorporated as overtime compensation.

This entry was written by Michele Babb.

Photo credit: Matthew John Hollinshead