Explicit Mutual Wage Agreement Can Defeat Overtime Claim
In a surprisingly helpful opinion for employers, the Second Appellate District ruled that an employer and employee can explicitly agree to a compensation arrangement whereby a non-exempt employee can receive a fixed salary for all work (including overtime hours) if the agreement properly provided for the payment of overtime wages at the correct premium rate.
In Arechiga v. Dolores Press, Arechiga sued his employer for additional overtime wages. Arechiga worked as a janitor for Dolores Press, and orally agreed to work eleven hours a day and six days a week, or a total of 66 hours weekly. The parties' written agreement stated "Employee shall be paid a salary/wage [with salary circled] of $880.00" weekly. After Arechiga's employment was terminated, he sued Dolores Press for unpaid overtime, asserting that his salary of $880 compensated him only for a regular 40-hour workweek at an imputed base pay of $22 per hour, and that he was entitled to unpaid overtime of 26 hours at the overtime premium rate each week during the statutory period.
Arechiga premised his claim on Labor Code § 515, which states that "[f]or 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." Dolores Press disagreed, asserting that under California's "explicit mutual wage agreement" doctrine, the parties may agree to a guaranteed fixed salary so long as the employer pays the employee for all overtime at least one and one-half times the employee's base rate of pay. The trial court entered judgment for Dolores Press, which was upheld on appeal. In doing so, the Court of Appeal rejected Arechiga's assertion that Labor Code § 515 outlawed explicit mutual wage agreements. Although the judicial opinions validating the use of mutual wage agreements predated the passage of Section 515 in 2000, no case law supports Arechiga's position. The Court of Appeal expressly rejected a provision from the DLSE's Enforcement Policies and Interpretations Manual that purported to interpret Section 515 as rejecting explicit mutual wage agreements. Because there was sufficient evidence in the record to establish the employer's contention that the parties agreed to a base rate of $11.14 per hour and the $880 weekly salary fully compensated Arechiga for all hours of overtime worked, judgment for the employer was upheld.
Employers should be careful when entering into mutual wage agreements to make sure they comply with the legal requirements, such as: (1) specifying the basic hourly rate of compensation upon which the guaranteed salary is based before the work is performed; (2) specifying that the employee will be paid at least one and one-half times the agreed-upon rate for hours in excess of 8 in a day and 40 in a week; and (3) informing the employee that the salary would cover both his regular and overtime hours. If the employee works a set number of hours each week and the compensation reflects he or she was paid at the correct premium rate, this case validates the use of mutual wage agreements for non-exempt employees in California.