Court Rules that an Employer Using an Explicit Mutual Wage Agreement is Not Required to Pay Additional Overtime


March 11, 2011

Introduction

In a recent opinion, the California Court of Appeal ruled that an employer and employee may explicitly agree to a pay arrangement in which a non-exempt employee may receive a fixed salary for all work (including overtime hours), provided that the agreement provides payment for overtime wages at the correct rate.   

The Facts

Dolores Press, Inc. hired Carlos Arechiga in January 2000 to work as a janitor.  At that time, the parties verbally agreed that Arechiga would work 11 hours per day, six days per week, for a total of 66 hours per week.  Because Arechiga was not exempt from overtime requirements under the federal Fair Labor Standards Act ("FLSA"), he was entitled to 26 hours of overtime pay each week.  The parties agreed that Arechiga's total compensation would be $880 per week. 

This agreement was not reduced to writing until 2003.  At that time, Dolores Press asked Arechiga to enter into an employment agreement.  The main reason for this agreement was to institute privacy safeguards for members of a religious body affiliated with Dolores Press.  However, the employment agreement also contained language stating that Arechiga would be paid a salary of $880.00. 

In September 2006, Dolores Press terminated Arechiga's employment.  In 2007, Arechiga sued Dolores Press, bringing several wage and hour causes of action, along with a claim that Dolores Press had committed unfair business practices in violation of California Business and Professions Code section 17200.  Arechiga's wage and hour claims were dismissed, leaving for trial only his unfair business practices claim. 

Arechiga predicated his unfair business practices claim on Labor Code section 515, which provides that, for purpose of computing an employee's overtime rate, "the employee's regular hourly rate shall be 1/40th of the employee's weekly salary."  Arechiga used this language to argue that Dolores Press owed him overtime pay at 1.5 times his hourly base rate for 26 hours of overtime per week for the last three years.  According to Arechiga, his base salary was $22.00 per hour, and did not include the 26 hours of overtime he worked each week.  Dolores Press disagreed, arguing that it used California's "explicit mutual wage agreement" doctrine to guarantee Arechiga a fixed salary that included all of the weekly overtime to which he was entitled.  According to Dolores Press, it paid Arechiga for all of the hours he worked at an hourly wage of $11.14 and an overtime rate of $16.71. 

At trial, the court found that the parties had an explicit mutual wage agreement in which Arechiga's fixed weekly salary properly compensated him for both his regular and overtime hours worked.  Arechiga appealed. 

The Court of Appeal found substantial evidence that the parties had entered into an explicit mutual wage agreement.  Despite Arechiga's argument that he did not explicitly agree to a wage of $11.14, the Court found legally sufficient evidence from witnesses establishing that he was aware his rate of pay would be $11.14 per hour, not $22.00.  Furthermore, the Court rejected Arechiga's argument that enactment of Labor Code section 515 in 2000 abolished the doctrine explicit mutual wage agreements.  Accordingly, the Court affirmed the trial court's dismissal of Arechiga's case. 

Conclusion

The Arechiga decision makes it clear that explicit mutual wage agreements continue to be valid in California, despite the enactment of Labor Code section 515.  However, before entering into an explicit mutual wage agreements with an employee, employers should consult with counsel to ensure that such an agreement is otherwise compliant with both the FLSA and state law.  In addition, such agreements must be reduced to writing before any work begins.  This writing should include: 1) the salary the employee will be guaranteed to receive; 2) the days the employee will work each week; 3) the number of hours the employee will be expected to work each week; 4) the basic hourly rate of compensation upon which the guaranteed salary is based; 5) a confirmation that the employee will be paid time-and-one-half for hours in excess of eight in one day and 40 in one week; and 6) a statement that the salary will cover both regular and overtime hours. 

This article was written by Brianne Marriott, an attorney with the labor and employment law firm of Liebert Cassidy Whitmore (LCW).  For more information regarding the discussion above or on our firm please contact one of our offices below.

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