Salaried Non-Exempt: Not an Oxymoron Under California Law

March 14, 2011

On February 9, 2011, in a welcome decision for employers, the California Court of Appeal held in Arechiga v. Dolores Press, Inc. that employers may pay their non-exempt employees a salary provided the salary includes payment at the proper rate for all overtime work. Prior to the Arechiga decision, it was unclear whether such arrangements, commonly referred to as explicit mutual wage agreements, were permissible under California Labor Code section 515(d), which states, “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 employee in Arechiga maintained that pursuant to section 515(d), his salary of $880 a week compensated him only for a regular 40-hour workweek at an implied base rate of $22 per hour and did not include his regularly scheduled 26 hours of overtime. The employer argued that upon hire the parties had reached an oral agreement pursuant to which the employee would work 11 hours per day, six days per week, for a total of 66 hours per week, which would include 26 overtime hours. A few years after the employee began work, the parties entered into a written agreement which stated, “Employee shall be paid a salary/wage of $880.00.” The word “salary” was circled and the dollar amount was handwritten. The employer terminated the employee approximately three years later. The employee filed a lawsuit alleging multiple causes of action against the employer all of which were dismissed on summary judgment or withdrawn by the employee except a claim for unfair business practices.

As support for his position that his employer engaged in an unfair business practice by requiring him to enter into an agreement which was contrary to California law, the employee cited the Division of Labor Standards Enforcement’s (“DLSE”) Enforcement Policies and Interpretations Manual. Following the California Legislature’s enactment of section 515(d) in 2000, the DLSE maintained that the language in section 515 (d) precludes mutual wage agreements.

The employer argued that the explicit mutual wage agreement doctrine applied because the employee’s salary of $880 lawfully compensated him for both his regular and overtime work based on a regular hourly wage of $11.14 and an hourly overtime wage of $16.71. The trial court agreed. It explained that a mutual explicit wage agreement exists if there is an agreement between an employer and an employee prior to the employee performing any work that specifies: (1) the days 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 the salary was based; and (5) that the employee was told the salary covered both regular and overtime hours.

The Court of Appeal upheld the trial court’s decision. In rejecting the argument that Labor Code section 515 outlawed mutual wage agreements, the Court of Appeal explained that it would give no deference to the DLSE Manual because the regulators did not properly adopt it, making it non-binding on courts.

Significance for Employers

The Arechiga decision is particularly helpful for employers whose non-exempt employees work overtime on a scheduled and recurrent basis. Employers who wish to compensate non-exempt employees on a salary basis must carefully draft agreements to make sure that that the salary takes into account the number of hours worked at the regular rate and at the overtime rate or rates. Such agreements should clearly identify the number of hours of work each day and week and the method of calculating the salary and should contain an acknowledgment stating that the employee understands that the salary covers both regular and overtime hours.

For example, an employer who is calculating the salary of an employee whose regular rate is $10 per hour and who is scheduled to work 13 hours one day, 12 hours the next day and 8 hours on each of the following three days should state in writing that the salary of $540 per week consists of the following: (40 hours * $10.00 an hour) + (8 hours * $15.00 an hour (1.5 times the regular rate)) + (1 hour * $20.00 hr (2 times the regular rate)).

Employers should also be aware that even if they enter into enforceable explicit mutual wage agreements with their employees, they will still be required to pay overtime at the proper rate if the employee works more hours than those covered by the agreement.

For more information on this alert, please contact any of the lawyers listed below:

John Adkins,, 617.951.8551
Jenny Cooper,, 617.951.8473
Louis Rodriques, Co-chair, Labor and Employment Group,, 617.951.8340

Los Angeles/Orange County 
Jacqueline Cookerly Aguilera,, 213.229.8439
Debra Fischer,, 213.680.6418

San Francisco
James Severson,, 415.393.2242

New York
Douglas Schwarz,, 212.705.7437

Mie Fujimoto,, 81.3.6721.3138

This article was originally published by Bingham McCutchen LLP.