Minizza v. Stone Container Corp. Corrugated Container Div. East Plant

SLOVITER, Circuit Judge,

dissenting.

I respectfully dissent from the majority’s decision reversing the district court’s judgment requiring the employers to include the lump sum bonuses they paid to the employees as part of their regular rate of pay in calculating overtime. I do so for three reasons: first, I believe the majority has given insufficient deference to the district court’s factual findings; second, I cannot agree with the majority’s construction of the statute; and third, I fear that this decision places the court’s imprimatur on a method of evading the FLSA and opens the door to widespread evasion.

I.

As the majority notes, the Department of Labor (DOL), the agency that has the responsibility for enforcing the Fair Labor Standards Act, has taken the position that the includability of bonuses in employees’ “regular rate” requires an ad hoc determination based on the particular circumstances applicable in each case. It follows that a somewhat more extensive review of the negotiations leading to the 1984 agreement may be useful.

The negotiations were principally conducted on the employers’ side by the Philadelphia Container Association, which represented all the defendants who remain as defendants here with the exception of Stone Container Corporation, West Plant (Stone West). Although the prior agreements with Local 375 (Union) had provided for annual wage increases, the employers this time, because of an adverse economic climate in the country and in the paper industry, sought to get the Union to hold the line on wages and make concessions in the medical benefits programs. As could be expected, the Union resisted.

At first, the employers requested a two-tiered wage system (lower rates for new hires) and the Union proposed an increase of $1.25 per hour for each year of the contract. The employers then proposed a bonus of $250 to be paid during the second and third years of the contract, with “no other wage or salary adjustments during the life of the Agreement.” App. at 94 (emphasis added). Payment of a bonus in *1464 lieu of a wage increase can be advantageous to an employer because the parties can also agree not to factor the payment into the value of benefits such as vacation and holiday pay, i.e., to preclude a “roll-up” effect, and because subsequent contract negotiations generally begin with the base rate of pay, which does not reflect the bonus.

The initial agreement reached by the negotiators here provided for a lump sum bonus of $500 at the beginning of the first year, $250 at the second, $200 at the third, with wages frozen the first year, a 15 cents per hour increase in the second, and a 40 cents per hour increase in the third, as well as a $250 deductibility in medical plans. This agreement was rejected by the employees’ vote.

Ultimately, the new three-year collective bargaining agreement reached on July 13, 1984 provided for a lump sum $750 bonus to employees on July 1, 1984, which was the starting date of the new contract, and $500 on July 1, 1985, one year later. In addition, the wage increase for the third year was raised to $.50 per hour and the employees agreed to extend the agreement to 36 months (rather than 33 months). To be eligible for the $750 first-year bonus, an employee had to be actively employed for the three months prior to the date of payment; to be eligible for the $500 second-year bonus, an employee had to be actively employed for the six months prior to the date of the bonus. App. at 45. Anyone who was not on active status on the date of the bonus but who returned from sick leave or was recalled from layoff in the 12 months following that date received a pro-rata share of the bonus, according to the number of months worked in that year. Id.

Months later, because counsel for the Union had concluded that the Fair Labor Standards Act required the lump sum payments to be allocated on an hourly basis for use in computing overtime compensation, the Union wrote to the Administrator of the Wage and Hour Division of the Labor Department in March 1985, requesting his opinion on whether the FLSA required the inclusion of the lump sum payments in the employee’s “regular rate” for purposes of overtime compensation. The Deputy Administrator’s response, dated April 21, 1986 (“1986 Opinion Letter”), concluded that it was a matter for the parties to work out, “through litigation or otherwise.” App. at 36. The Union then filed this lawsuit.

After trial, the district court, sitting as the factfinder, found as one of its enumerated Findings of Fact that the payments were made “in lieu of wage increases”— that the bonuses were discussed at the contract negotiations under the subject of wages and recorded as such, were translated into cents-per-hour in the discussions between the parties, and that the employer changed the bonus amounts it offered in response to, or in conjunction with, proposals for cents-per-hour increases. App. at 8. In its subsequent discussion, the district court stated that, “[wjhile not tied directly to hours worked, the correlation in the eligibility provisions between work and bonus receipt supports the conclusion that the bonuses were compensation for employment.” App. at 11.

There is more than sufficient support in the record for the district court’s findings that the bonuses were in lieu of wages to survive the “clearly erroneous” standard of review. The proposal offered to the Union by the Container Association, bargaining on behalf of the employers, listed its lump sum bonus proposal under the heading “Wages”. App. at 94. The language of the sentence following that bonus proposal, which states that “[t]here shall be no other wage or salary adjustments during the life of the Agreement,” id. (emphasis added), shows that the employer thought of the proposed bonuses as a wage or salary adjustment. Both the first and second Memorandum of Agreement between the negotiating parties listed the bonuses under the topic “Wages”, App. at 37, 62, and the final contracts negotiated list the bonuses under the title “Wages and Bonuses”, App. at 45, or simply “Wages”, App. at 75.

The majority, although never explicitly denominating as clearly erroneous the dis *1465 trict court’s finding that the bonuses were made in lieu of wage increases, nonetheless fails to give that finding the weight that it requires. Thus, for example, the majority states that “[t]he facts show that these payments were nothing more or less than [a ratification] inducement by the employers to the employees,” and not payments relating to hours of employment or service. Maj. op. at 1462. However, the district court found that the bonuses were no different than other terms of the agreement because “[e]very aspect of a labor agreement is intended to induce ratification and achieve labor peace.” App. at 8. It explained further, “an inducement to ratify is an inducement for future services.” Id. The majority’s finding that the eligibility requirements were simply to achieve ratification is a finding that we, as appellate judges, are not free to make since it is inconsistent with the finding made by the district court, supported by the record, that the bonuses were “compensation for employment.” App. at 11.

II.

The majority concludes that the bonuses here are exempt from inclusion in the computation of the employees’ “regular rate” pursuant to section 7(e) of the Act, 29 U.S.C. § 207 (e). The definition of “regular rate” expressly includes “all remuneration for employment paid to, or on behalf of, the employee,” but sets forth seven exclusions to the regular rate, which include, inter alia,

(2) payments made for occasional periods when no work is performed due to vacation, holiday, illness, failure of the employer to provide sufficient work, or other similar cause; reasonable payments for traveling expenses, or other expenses ... properly reimbursable by the employer; and other similar payments to an employee which are not made as compensation for his hours of employment;

(3) Sums paid in recognition of services performed during a given period if either, (a) both the fact that payment is to be made and the amount of the payment are determined at the sole discretion of the employer at or near the end of the period and not pursuant to any prior contract, agreement, or promise causing the employee to expect such payments regularly; [(b) omitted].

29 U.S.C. § 207 (e)(2), (3) (emphasis added).

The majority accepts the employers’ argument that the bonuses fall within section (e)(2) above and are therefore “similar payments” because they share the character of the other payments set forth in that “they are not payments relating to hours of employment or service.” Maj. op. at 1462. Of course, if the district court’s contrary finding is given appropriate weight, the majority’s conclusion must fall.

It is important to note that a payment may be compensation for an employee’s “hours of employment” even if it is not tied to specific hours worked. The DOL regulations in this regard provide:

It is clear that the [“other similar payments”] clause was not intended to permit the exclusion from the regular rate of payments such as bonuses or the furnishing of facilities like board and lodging which, though not directly attributable to any particular hours of work are, nevertheless, clearly understood to be compensation for services.

29 C.F.R. § 778.224 (a) (1987) (emphasis added). Another regulation reinforces this interpretation, since it provides: “Bonuses which are announced to employees to induce them to work more steadily or more rapidly or more efficiently or to remain with the firm are regarded as part of the regular rate of pay. Attendance bonuses, individual or group production bonuses, bonuses for quality and accuracy of work, bonuses contingent upon the employee’s continuing in employment until the time the payment is to be made ... must be included in the regular rate of pay.” 29 C.F.R. § 778.211 . The DOL’s interpretation of the statute as not requiring that compensation be pegged to a particular time period or number of hours worked is owed deference. See Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842-44 , 104 S.Ct. 2778, 2781-82 , 81 L.Ed.2d 694 (1984).

*1466 Another reason these bonuses cannot be viewed as falling within the section 7(e)(2) exclusion is that they are not “similar” to the other payments specified in the other clauses of section 7(e)(2). As explained by the regulations, the first clause of section 7(e)(2), which speaks of payments made for “occasional periods” such as holidays, refers only to “absences of a nonroutine character which are infrequent or sporadic or unpredictable,” 29 C.F.R. § 778.218 (d) (1987), which was not the case here. Patently, as well, the bonuses were not “similar to” the reimbursement of expenses detailed in the second clause of section 7(e)(2). If the third clause of section 7(e)(2) was intended to encompass an independent class of payments, as the majority suggests, it is unlikely Congress would have defined that class only as “similar” to those in the two preceding clauses.

Finally, it is unlikely that Congress would have intended bonuses to be excluded under section 7(e)(2) when it provided another exclusion, section 7(e)(3), which deals directly with payments construed by DOL as covering certain bonuses. Significantly, section 7(e)(3) only excludes bonuses given at the total discretion of the employer, which was clearly not the case with these negotiated payments. DOL's interpretative regulation states:

The bonus, to be excluded under section 7(e)(3)(a), must not be paid “pursuant to any prior contract, agreement, or promise.” For example, any bonus which is promised to employees upon hiring or which is the result of collective bargaining would not be excluded from the regular rate under this provision of the Act.

29 C.F.R. § 778.211 (emphasis added).

I thus find no statutory support for the majority’s position that the statute requires exclusion from the “regular rate of pay” of bonuses bargained for and paid to employees who must have worked a specified period before they could be eligible therefor.

III.

My overriding concern with the majority’s opinion in this case of first impression is that it will open the doors to widespread evasion of the overtime provisions of the Fair Labor Standards Act. Indeed, the brief for one of the amici notes that it has been reported that “one-third of all noncon-struction bargaining agreements negotiated in 1986 contain provisions for some form of lump sum payments.” Brief of Amicus Curiae Chamber of Commerce at 4 (citing Collective Bargaining Negotiations and Contracts (BNA), 18:451-452). If the lump sum payments referred to are, as in this case, substitutes for compensation for services performed, then the era of evasion is already upon us. I find it difficult to believe that Congress envisoned that the bargaining parties could agree to substitute non-discretionary, collectively bargained bonuses in lieu of wages and thereby decrease the amount of overtime that must be paid to the workers. I would instead affirm the judgment of the district court.