BILL ANALYSIS Ó
Senate Committee on Labor and Industrial Relations
Ted W. Lieu, Chair
Date of Hearing: June 13, 2012 20011-2012 Regular
Session
Consultant: Alma Perez Fiscal:Yes
Urgency: No
Bill No: AB 2103
Author: Ammiano
As Introduced/Amended: April 10, 2012
SUBJECT
Employment: wages and hours: overtime
KEY ISSUES
Should an employee be paid for total hours worked regardless of
whether he/she is paid on a fixed salary or an hourly basis?
Should compensation for an employee paid on a salary basis
include a fixed amount for both regular pay and overtime pay for
hours worked -- even if the employee works more one week than
another?
PURPOSE
To provide clarity regarding the hours and rate of pay a
salaried employee is being compensated for when receiving his or
her payment.
ANALYSIS
Existing law , with certain exceptions, defines a day's work as
eight hours of labor. Overtime wages are required to be paid to
nonexempt employees for any hours worked after eight in one
workday or after 40 in one workweek. Overtime is compensated as
follows:
Any work in excess of eight hours in one workday, any
work in excess of 40 hours in any one workweek, and the
first eight hours worked on the seventh day of work in any
one workweek shall be compensated at the rate of no less
than one and one-half times the regular rate of pay for an
employee;
Any work in excess of 12 hours in one day shall be
compensated at the rate of no less than twice the regular
rate of pay for an employee;
Any work in excess of eight hours on any seventh day of
a workweek shall be compensated at the rate of no less than
twice the regular rate of pay of an employee.
Under existing law , for 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. ŻLabor Code
§515(d)]
This Bill would provide further clarity as to what hours and
rate of pay a salaried employee is being compensated for when
receiving his or her payment.
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.
COMMENTS
Hearing Date: June 13, 2012 AB 2103
Consultant: Alma Perez Page 2
Senate Committee on Labor and Industrial Relations
1. Background: Arechiga v. Dolores Press
Under existing law, overtime wages are required to be paid to
a nonexempt employee for any hours worked over eight in a
workday, or over 40 in a workweek. Most nonexempt employees
are paid an hourly rate, making the calculation of their
overtime pay a relatively straight forward process
(one-and-one-half times the regular rate of pay). However,
employers are also allowed to pay employees on a salary
(rather than an hourly) basis, as long as the employer
properly compensates the employee for overtime work as
required by law. Determining the regular and overtime rate of
pay for a salaried employee is a more complicated process than
calculations of an employee paid on an hourly basis.
Currently, 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). ŻLabor Code §515(d)] The overtime
rate is then determined by multiplying this regular rate by
the appropriate overtime rate. However, differing
interpretations of the law have raised the question of whether
a fixed salary includes payment for regular hours as well as
overtime hours worked.
In Arechiga v. Dolores Press, (2011) 192 Cal. App. 4th 567,
Arechiga and his employer orally agreed he would work eleven
hours a day, six days a week, for a total of 66 hours at a
fixed salary of $880 a week. According to the court, because
Arechiga was a nonexempt employee under labor law, the
agreement between Arechiga and his employer meant he earned 26
hours of overtime pay each week and the $880 salary covered
both his regular and overtime hours. In 2006, Arechiga was
terminated after six years of employment and in 2007 he filed
a complaint alleging multiple causes of action against his
employer. Citing Labor Code §515(d), Arechiga argued that his
salary of $880 compensated him only for a regular 40-hour work
week at $22 per hour ($880/40 hours). Therefore, Arechiga
argued, the employer owed him $33 per hour for the 26 weekly
hours of overtime worked for the three years alleged in the
complaint.
Hearing Date: June 13, 2012 AB 2103
Consultant: Alma Perez Page 3
Senate Committee on Labor and Industrial Relations
Dolores Press, however, disagreed with Arechiga's assertion
and argued that California's "explicit mutual wage agreement"
doctrine applied. According to the employer, under the
doctrine, an employer and employee may lawfully agree to a
guaranteed fixed salary as long as the employee is being
compensated for all overtime as required by law. The court
agreed with the employer and found that an explicit mutual
wage agreement existed under which the $880 salary lawfully
compensated the employee for both his regular and overtime
work based on an $11.14 hourly wage and an $16.71 hourly
overtime wage.
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.
In reaching their decision, the court relied on a series of
federal cases, one in particular (Walling v. A.H. Belo Corp.
(1942) 316 U.S. 624) in which the U.S. Supreme held that
nothing in the Federal Labor Standards Act (FLSA) prohibits an
employer from paying its employee a fixed salary to cover a
specified number hours, consisting of both regular and
overtime hours. The court held that as long as the agreement
between the employer and employee provided a fixed salary for
the specific number of hours, specified the basic hourly rate
of pay of no less than the minimum wage, and paid not less
than one and one-half times that rate for every hour of
overtime worked beyond the maximum non-overtime hours, then
the employees are not entitled to additional overtime pay
unless they exceed the number of hours specified in the
agreement.
2. Need for this bill?
At question in Arechiga v. Dolores Press was also the issue of
whether California law even allows for "explicit written wage
agreements" between the employer and employees. The court
found that Labor Code §515 does not outlaw explicit mutual
Hearing Date: June 13, 2012 AB 2103
Consultant: Alma Perez Page 4
Senate Committee on Labor and Industrial Relations
wage agreements and stated that "an employer and employee may
lawfully agree to a guaranteed salary as long as the employee
receives the appropriate overtime pay for any hours worked
beyond the statutorily defined workday of eight hours."
However, the Division Labor Standards Enforcement (DLSE)
Enforcement Policies and Interpretations Manual provides a
different interpretation of what current law allows.
According to the DLSE, explicit written wage agreements are
not allowed since the enactment of Labor Code Section 515(d)
ŻAB 60(Knox) of 1999]. 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." DLSE
Enforcement Policies and Interpretations Manual, Section
49.1.5.
Critics of the Arechiga v. Dolores Press decision have argued
that it improperly relied upon 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) to ensure that employees are correctly compensated for
overtime hours worked. Given the inconsistent interpretations
of how salaried employees are required to be paid and whether
an "explicit written wage agreement" is even allowed, the bill
is necessary to provide clarity and specify 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. Thereby requiring employers to pay their
salaried employees for any overtime hours worked separately.
Hearing Date: June 13, 2012 AB 2103
Consultant: Alma Perez Page 5
Senate Committee on Labor and Industrial Relations
3. Proponent Arguments :
According to the author, prior to the Arechiga decision,
state law was clear in that non-exempt workers could be paid
hourly or by salary, but any overtime hours worked must be
calculated separately and added onto regular pay. The author
argues that the Arechiga ruling is dangerous because it allows
employers to estimate overtime and include it in a fixed
salary without fairly compensating for any additional hours
worked. Proponents also argue that the court took a very
simple, bright line rule in labor law enforcement and made it
hopelessly complicated, turning Labor Code §515 (d) on its
head and making the law more confusing for employers and
employees and opening the door for potential worker abuse.
Proponents also argue that this bill simply restores the
status quo prior to a misguided and short-sighted court
decision that jeopardized the rights of low-wage workers. They
argue that the policy of calculating overtime hours separately
is better for workers and for employers because it promotes
better record-keeping and a clear understanding to both
parties of what constitutes a regular workweek and what is
additional overtime.
4. Opponent Arguments :
None received.
SUPPORT
California Conference Board of the Amalgamated Transit Union
California Conference of Machinists
California Labor Federation
California Nurses Association
California Teamsters Public Affairs Council
Engineers and Scientists of California, IFPTE Local 20, AFL-CIO
International Longshore & Warehouse Union
Professional and Technical Engineers, IFPTE Local 21, AFL-CIO
Hearing Date: June 13, 2012 AB 2103
Consultant: Alma Perez Page 6
Senate Committee on Labor and Industrial Relations
UNITE HERE, ALF-CIO
United Food & Commercial Workers, Western States Council
Utility Workers Union of America, Local 132
OPPOSITION
None received
Hearing Date: June 13, 2012 AB 2103
Consultant: Alma Perez Page 7
Senate Committee on Labor and Industrial Relations