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Governor Brown Signed AB 2103 Making Clear "Mutual Wage Agreements" are Illegal in California

October 1 2012

As the L&E Law Blog readers may recall from the August 31, 2011 blog post and the teleseminar I conducted on September 14, 2011, the court in Arechiga v. Dolores Press, Inc. (2011) 192 Cal. App. 4th 567 was the sole California decision that held that “mutual wage agreements” were legal in California despite the express language in section 515 of the Labor Code.

Review of Arechiga:

In Arechiga, the court held that mutual wage agreements that factored in overtime pay into a non-exempt employee’s set weekly compensation were enforceable if they were in writing and contained at least the following:

(1) the days that the employee would work each week;
(2) the number of hours the employee would work each day;
(3) that the employee would be paid a guaranteed salary of a specific amount;
(4) that the employee was told the basic hourly rate upon which his salary was based;
(5) that the employee was told his salary covered both his regular and overtime hours; and
(6) that the agreement was reached before the work was performed.

AB 2103:

AB 2103 was signed by Governor Brown on September 30, 2012. The bill expressly states that “[i]t is the intent of the Legislature, in enacting this act, to overturn the decision in Arechiga v. Dolores Press (2011) 192 Cal.App.4th 567.”

Section 515(d)(1) of the Labor Code has always provided that when calculating the overtime rate for non-exempt full time salaried employees, “…the employee’s regular hourly rate shall be 1/40th of the employee’s weekly salary.” The court in Arechiga held that such language did not preclude an employer and employee from agreeing to a set regular rate of pay and set overtime rate of pay, all of which is included in a set weekly salary. In order to prevent an employer from factoring in overtime into a non-exempt employee’s weekly salary, the new law adds the following language to section 515(d):

“(2) Payment of a fixed salary to a nonexempt employee shall be deemed to provide compensation only for the employee’s regular, non-overtime hours, notwithstanding any private agreement to the contrary.”

Therefore, the strict reading of section 515 that California courts applied prior to the Arechiga case is now codified in the statute.

What Does All of This Mean?

Using the facts from the Arechiga as an example, below is the difference in overtime pay a non-exempt employee paid on a salary basis would receive under section 515 versus under an illegal mutual wage agreement.

  • Employer and employee agree that a salaried non-exempt employee will work 11 hours a day, 6 days a week, for a total of 66 hours per week (26 hours of which were overtime) and will be paid a set weekly salary of $880.00
    • Under an illegal mutual wage agreement, the employee’s regular rate of pay is $11.14 per hour and the overtime premium is $16.71 per hour. The employee is paid a total of $880.00.
    • Pursuant to Labor Code section 515(d), the employee’s regular rate of pay is $22.00 per hour and the overtime premium is $33.00 per hour. ($880.00 / 40 hours = $22.00 and $22 x 1 ½ = $33.00). Thus, the employee would be entitled to $880.00 for all regular hours (40 hours) and an additional $858.00 in overtime pay (26 hours x $33.00 per hour).

Lesson.

There is a big difference between the two methods of calculation – $858.00! Therefore, if employers are going to pay non-exempt employees on a salary basis, they must remember that such salary will be used to calculate their regular rate of pay based on a statutory 40 hour workweek, which will in turn form the basis of their overtime premiums. The higher the weekly salary, the higher the regular rate and overtime premiums will be.