The general rule in California is that a non-exempt employee’s salary only compensates the employee for the regular hours worked. This means if you pay an employee a set salary each week the employee is still entitled to overtime if s/he works more than 8 hours in a day or 40 hours in a week. Several cases previously held that the only exception to this general rule is if you and the employee enter into an explicit mutual wage agreement prior to performing the work. See, e.g., Espinoza v. Classic Pizza, Inc., supra, 114 Cal.App.4th at p. 974; Ghory v. Al-Lahham, supra, 209 Cal.App.3d at p. 1491; accord Hernandez v. Mendoza (1988) 199 Cal.App.3d 721, 725–726 ["Absent an explicit, mutual wage agreement, a fixed salary does not serve to compensate an employee for the number of hours worked under statutory overtime requirements."]; Alcala v. Western Ag Enterprises (1986) 182 Cal.App.3d 546, 550–551 ["explicit agreement" for a fixed salary can comply with overtime laws]; Brennan v. Elmer’s Disposal Service, Inc. (9th Cir. 1975) 510 F.2d 84, 86 fn. 1.
Many employers used this exception to fit the realities of the job. If an employee was regularly scheduled to work 50 hours per week, the employer and employee would agree the employee would receive $8.00 per hour for the first 8 hours per day & 40 hours per week, and $12.00 per hour for any hours in excess of 8 per day or 40 per week. Employers could then pay a set salary without violating the overtime requirements, so long as the employee did not work more than the amount set forth in the explicit mutual wage agreement.
This also had the added benefit of lowering the employee’s regular rate of pay. If a non-exempt employee is paid a salary without an explicit mutual wage agreement then the employee’s regular rate of pay is calculated by dividing the weekly salary by 40 (the maximum regular hours the employee could work) instead of the total hours worked. This sometimes resulted in a higher regular hourly rate than the parties contemplated.
The legislature later modified Labor Code Section 515(d) to state: For the purpose of computing the overtime rate of compensation required to be paid to a nonexempt full-time salaried employee, the employee’s regular hourly rate shall be 1/40th of the employee’s weekly salary.
The Labor Commissioner opined that this modification eliminated the “explicit mutual wage agreement” exception to the general rule. According to the Labor Commissioner, a non-exempt employee who is paid a fixed salary is paid nothing for the overtime hours even if the employer and employee had an explicit mutual agreement that the salary would cover the regular hours and overtime hours.
A California Court of Appeal disagrees with the Labor Commissioner. In Arechiga v. Dolores Press, Inc. (11 C.D.O.S. 1733), the employer and employee agreed to pay the employee $11.14 per hour for the regular hours worked and $16.71 for the overtime hours, and that the employee would regularly work 66 hours per week for a weekly salary of $880.00. Relying on the Labor Commissioner’s position, the employee brought suit claiming the $880.00 only compensated the employee for the first 8 hours in a day and the first 40 hours in a week. The Court of Appeal reaffirmed that the Labor Commissioner’s manual is entitled to no deference, and upheld the parties’ right to negotiate a weekly salary based on a specified agreed hourly rate.
There is no word yet whether this decision will be appealed, or if appealed what the Supreme Court might do.
I expect many employers may take the opportunity to modify their payment arrangements with their employees because Arechiga may help significantly limit exposure. Employers should be sure to enter into an explicit mutual wage agreement before the work is performed. As in most cases, the employer should also put the agreement in writing. We highly recommend consulting with attorneys familiar with California wage and hour law before modifying your policies.
Phillip J. Griego & Associates
95 South Market Street, Suite 520
San Jose, CA 95113
Original article by Robert E. Nuddleman of Phillip J. Griego & Associates
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