BILL ANALYSIS Ó
AB 2103
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Date of Hearing: April 18, 2012
ASSEMBLY COMMITTEE ON LABOR AND EMPLOYMENT
Sandre Swanson, Chair
AB 2103 (Ammiano) - As Amended: April 10, 2012
SUBJECT : Employment compensation: overtime.
SUMMARY : Clarifies that "explicit mutual wage agreements"
provide only regular compensation, and not overtime
compensation, as specified. Specifically, this bill :
1)Provides that payment of a fixed salary to a nonexempt
employee shall be deemed to provide compensation only for the
employee's regular, non-overtime hours, notwithstanding any
private agreement to the contrary.
2)Declares the intent of the Legislature, in enacting this bill,
to overturn a recent California Court of Appeal decision in
Arechiga v. Dolores Press (2011) 192 Cal. App. 4th 567.
3)Makes other technical and nonsubstantive changes to existing
law.
FISCAL EFFECT : Unknown
COMMENTS : This bill is intended to overturn a recent
California Court of Appeal decision dealing with "explicit
mutual wage agreements."
Under California law, overtime wages are required to be paid to
a nonexempt employee for any hours worked after eight in one
workday or after 40 in one workday. Most nonexempt employees
are paid an hourly rate of pay, which makes the calculation of
their overtime rate of pay relatively simple (one-and-one-half
times the regular rate of pay).
However, nothing prohibits an employer from paying a nonexempt
employee on a salary (rather than an hourly) basis, as long as
the employer properly compensates the employee for overtime work
as required by the law. Obviously, determining the regular and
overtime rate of pay is a more complicated exercise for salaried
employees rather than hourly employees.
Existing California law (Labor Code Section 515(d)) provides
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that, for a nonexempt full-time salaried employee, the
employee's regular rate of pay is calculated by dividing their
weekly salary by 40 (to essentially determine a regular "hourly"
rate of pay). The overtime rate is then determined by
multiplying this regular rate by one-and-one-half<1>.
This bill deals with a recent court decision in which the
employer attempted to utilize an "explicit mutual wage
agreement" which essentially provided for a fixed salary that
purported to compensate the employee for all regular and
overtime hours worked. Arechiga v. Dolores Press (2011) 192
Cal. App. 4th 567.
In the Arechiga case, a janitor and his employer agreed that
payment of a fixed salary of $880 a week would provide
compensation for 66 hours of work each week. The Court of
Appeal held that this method of payment comported with
California overtime law, and that no additional overtime
compensation was owed. The Court rejected the employee's
contention that existing Labor Code Section 515(d) prohibits any
sort of agreement that would allow a fixed salary to serve as a
non-exempt employee's compensation for anything more than a 40
hour workweek.
The Court in Arechiga relied on a series of federal cases
arising under the FLSA. The seminal federal case on this issue
was Walling v. A.H. Belo Corp. (1942) 316 U.S. 624. In that
case, the U.S. Supreme Court held that nothing in the FLSA
prohibited an employer from paying its employee a fixed salary
to cover a specified number of hours, consisting of both regular
and overtime hours, without payment of additional overtime
compensation if the employees did not work more than the
specified amount of overtime. The Court rejected the U.S.
Department of Labor's contention that the employees were
entitled to overtime pay for hours worked beyond statutory
non-overtime hours, holding instead that as long as the
agreement providing a fixed salary for up to a specific number
of hours also specified a basic hourly rate of pay of no less
than the minimum wage, and not less than one and one-half times
that rate for every hour of overtime worked beyond the maximum
---------------------------
<1> This contrasts with the "fluctuating workweek" method used
under federal law under the Fair Labor Standards Act (FLSA).
Under this "fluctuating workweek" method, the regular rate is
calculated by dividing the weekly salary by the total number of
hours (including overtime hours) worked in a week.
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non-overtime hours fixed by the FLSA, the employees are not
entitled to additional overtime pay unless they exceed the
number of hours specified in the agreement. The Supreme Court
acknowledged that its decision, "turns upon the meaning of the
words 'the regular rate at which he is employed,'" because the
FLSA requires that for all work in excess of the statutory
maximum, employees be paid "not less than one and half times the
regular rate at which he is employed." (Id., at 630.) But the
FLSA failed to provide any definition of this key term: "The
problem presented by this case is difficult - difficult because
we are asked to provide a rigid definition of 'regular rate'
when Congress has failed to provide one.... And that which it
was unwise for Congress to do, this Court should not do. When
employer and employees have agreed upon an arrangement which has
proven mutually satisfactory, we should not upset it and approve
an inflexible and artificial interpretation of the Act which
finds no support in its text...." (Id., at 634-635.)
Critics of the Arechiga decision have argued that it improperly
relied upon this federal court precedent, because in California
the statute explicitly defines the "regular rate of pay" for
nonexempt salaried employees (at Labor Code Section 515(d)).
Thus, these critics distinguish California law by noting that
the Legislature decided to expressly define this term precisely
to ensure that employees' right to overtime pay would not be
subverted by private agreements.
The Division of Labor Standards Enforcement (DLSE) Enforcement
Policies and Interpretations Manual seems to concur that such
agreements are not allowed since the enactment of Labor Code
Section 515(d). The DLSE Manual states the following:
"Salaried Non-Exempt - Explicit Written Agreement No Longer
Allowed. In the past, California law has been construed to
allow the employer and the employee to enter into an
explicit mutual wage agreement which, if it met certain
conditions, would permit an employer to pay a salary to a
non-exempt employee that provided compensation for hours in
excess of 40 in a workweek. (See, Ghory v. Al-Lahham (1989)
209 Cal.App.3d 1487, 257 Cal.Rptr. 924). Such an agreement
(backing in the regular rate) is no longer allowed as a
result of the specific language adopted by the Legislature
at Labor Code § 515(d). To determine the regular hour rate
of pay for a non-exempt salaried employee, one must divide
the weekly salary paid by no more than forty hours."
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DLSE Enforcement Policies and Interpretations Manual, Section
49-3.
ARGUMENTS IN SUPPORT :
The author states the following in support of this bill:
Prior to Ýthe Arechiga] decision, state law was clear.
Non-exempt workers could be paid hourly or by salary, but
any overtime hours worked must be calculated separately and
added onto regular pay. This ruling is dangerous because
it allows employers to estimate overtime and include it in
a fixed salary. That opens the door to workers being
required to work additional overtime without being fairly
compensated?
The court in Arechiga incorrectly followed certain federal
cases interpreting the Fair Labor Standards Act (FLSA). In
California, the Legislature has never followed the FLSA in
this area, opting for a clear, simple, and easy to enforce
rule?
Notwithstanding, the court in Arechiga failed to follow the
clear meaning of Section 515(d), turning this provision on
its head and making the law more confusing for employers
and employees."
Similarly, supporters argue that this bill simply restores the
status quo prior to a misguided and short-sighted court decision
that jeopardized the rights of law-wage workers. The policy of
calculating overtime hours separately is better for workers and
for employers. It promotes better record-keeping and a clear
understanding of both parties what constitutes a regular
workweek and what is additional overtime.
REGISTERED SUPPORT / OPPOSITION :
Support
American Federation of State, County and Municipal Employees
California Employment Lawyers Association (co-sponsor)
California Labor Federation, AFL-CIO
California Teamsters Public Affairs Council (co-sponsor)
Opposition
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None on file.
Analysis Prepared by : Ben Ebbink / L. & E. / (916) 319-2091