By: Gannon Elizabeth Johnson, LightGabler LLP
Can a non-exempt employee who works overtime ever receive a fixed salary? Over the last decade, this practice would have been strongly discouraged for California employers.* The case of Arechiga v. Dolores Press, Inc. (2011) 192 Cal.App.4th 567 changed that. In a shocking deviation from California’s normally inflexible wage and hour laws, the Arechiga court said that an employer and a non-exempt employee can enter into an agreement to pay the employee a salary designed to compensate him for all hours worked, including anticipated overtime. These agreements are commonly referred to in employment law as “explicit mutual wage agreements.”
To be valid, an explicit mutual wage agreement must:
(1) Set forth the days of the week the employee will work;
(2) Detail the number of hours the employee will work each day;
(3) Guarantee the employee a salary of a specific amount;
(4) Inform the employee of the basic hourly rate upon which the salary is based;
(5) Clarify that the salary will cover both regular and overtime hours; and
(6) Be agreed to by the employer and employee prior to the performance of any work subject to its terms.
There is no requirement that explicit mutual wage agreements be in writing, but documentation of this agreement prior to implementing the salary is critical to the company’s protection. Any employer considering such an agreement is strongly urged to commemorate it in writing and have it signed by the affected employee prior to commencing the salary payments.
The fact that such an agreement exists does not relieve the employer of the duty to track the hours worked by the employee (or to provide meal and rest periods, provide and maintain uniforms, etc.). In the event the employee works overtime hours not included in the explicit mutual wage agreement, the employee must be paid 1.5 times the hourly rate upon which the agreement is based. Despite this, an employer may not deduct any wages from the employee’s salary in the event the overtime hours envisioned in the agreement are not worked by the employee. It is also critical to ensure that the salary paid is sufficient to cover regular and overtime hours expected to be worked at a reasonable rate above the minimum wage.
Overall, given the stringent requirements and potential pitfalls of explicit mutual wage agreements, it is still the best practice for employers to pay non-exempt employees on an hourly basis. For those situations in which a salary is desired, Arechiga gives employers a clearer roadmap for implementing the arrangement legally. There are, of course, questions the Arechiga court left unanswered (or, in certain instances, created), so employers are strongly advised to consult their employment law attorney prior to entering into any explicit mutual wage agreement.
* The topic covered by this article has a corollary in the federal Fair Labor Standards Act. This article does not address the distinctions that exist between them.***
About the Author:
Gannon Elizabeth Johnson is an experienced litigator with LightGabler LLP and handles a wide variety of business disputes, class action litigation, employment and labor law and intellectual property matters. She is skilled in the prevention and defense of wage and hour class actions, having litigated a vast array of wage and hour issues for employers of all sizes in both administrative and judicial forums. She has extensive experience in the protection and disclosure of electronic business data, and provides training programs and policies for businesses on the retention, protection and lawful destruction of business and employment records.