New Law Prohibits Agreements That Pay Nonexempt Employees A Fixed Salary For Fixed Regular And Overtime Hours

On January 1, 2013, AB 2103 went into effect, explicitly overturning the case of Arechiga v. Delores Press, Inc., 192 Cal. App. 4th 567 (2011), and prohibiting compensation agreements that guarantee nonexempt employees a fixed salary for a guaranteed number of regular and overtime hours per week.  The new law amends California Labor Code Section 515(d).

Under existing California law, employers are generally required to pay nonexempt employees overtime for all hours worked in excess of 8 hours per day and 40 hours per week.  The former language of Labor Code Section 515(d) stated that, if a nonexempt employee was paid on a salary basis, the employee's regular hourly rate should be calculated at 1/40th of the employee's weekly salary.  The overtime rate would then be calculated based on that regular rate.  To provide certainty in overtime amounts, some employers entered into agreements to pay nonexempt employees a fixed salary for a predetermined, fixed number of hours per week, which was intended to compensate employees for both regular and overtime hours.

In the Arechiga case, which the new law overturns, the California Court of Appeal affirmed the enforceability of such fixed salary agreements that compensate for regular and overtime pay in one lump sum amount.  The trial court found that a written agreement that provided a fixed weekly salary of $880.00 lawfully compensated the employee for both a regular hourly wage of $11.14 and an overtime wage of $16.71, which covered 66 fixed hours of work a week.  The appellate court agreed, despite the fact that the agreement did not state the hourly rate, the number of hours per day, the number of hours per week, or even that the salary was meant to cover both the regular rate and overtime.  The trial court adduced all of this information from other evidence that it allowed in, to interpret the agreement.

The new law states that it is the intent of the Legislature to overturn the decision in Arechiga  and adds a new subsection to Labor Code Section 515(d), which states that " Payment of a fixed salary to a nonexempt employee shall be deemed to provide compensation only for the employee's regular, nonovertime hours, notwithstanding any private agreement to the contrary."  Cal. Lab. Code § 515(d)(2).

Employers should review their compensation arrangements with nonexempt employees to ensure that they do not run afoul of the new law.  It is advisable to consult with counsel to make certain that employees are being properly compensated for all regular and overtime hours.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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