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Explicit Mutual Wage Agreements in California

A recent appellate decision explains how California employers may implement an explicit mutual wage agreement that provides for payment of a weekly salary to cover both regular hours and overtime hours. The decision in Arechiga v. Dolores Press, Inc., Case No. B218171 (Cal. Ct. App. 2/7/2011) is available here.

California law requires employers to pay overtime to all non exempt employees who work more than eight hours in a day, or more than 40 hours in a week. Usually, an employer complies with this requirement by establishing an hourly wage for its employees, and then paying the appropriate overtime rate for extra hours (time and a half for all hours over eight in a day or 40 in a week, and double time for all hours over 12 in a day).

If the employer intends a particular employee or group of employees to work a fixed schedule that will always involve the same number of overtime hours, the explicit mutual wage agreement can be used to establish a regular pay schedule without computing overtime pay each pay period. In the Arechigacase, for example, there was an agreement that the employee would work eleven hours a day, six days a week, and that he would earn 26 hours of overtime pay each week. The employer paid a fixed salary of $880 per week, to cover 40 hours at a regular hourly rate of $11.14, and 26 hours at the overtime rate of $16.71.

The employee argued that the enactment of Labor Code section 515(d) in 2000 invalidated such agreement by providing that, for a salaried non exempt employee, “the employee’s regular hourly rate shall be 1/40th of the employee’s weekly salary.” The Court of Appeal disagreed, ruling that the salary referred to in section 515(d) was only that portion of the salary allocated to the regular hourly rate. The court explicitly disagreed with the contrary interpretation in the Enforcement Policies and Interpretation Manualpublished by the California Division of Labor Standards Enforcement.

An employer who wishes to implement an explicit mutual wage agreement should have each employee to whom it applies sign a document that (1) specifies the basic hourly rate of compensation on which the guaranteed salary is based before the work is performed, and (2) provides provides for payment of at least one and a half times the basic rate for all overtime hours. If the employee works more hours than those specified in the agreement, the employer will have to pay additional overtime at the appropriate rate.