BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                      



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          |SENATE RULES COMMITTEE            |                  AB 2103|
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                                 THIRD READING


          Bill No:  AB 2103
          Author:   Ammiano (D)
          Amended:  4/10/12 in Assembly
          Vote:     21

           
           SENATE LABOR & INDUSTRIAL RELATIONS COMM.  :  5-1, 6/13/12
          AYES:  Lieu, DeSaulnier, Leno, Padilla, Yee
          NOES:  Wyland
          NO VOTE RECORDED:  Runner
           
          SENATE APPROPRIATIONS COMMITTEE  :  Senate Rule 28.8

           ASSEMBLY FLOOR  :  51-24, 5/7/12 - See last page for vote


           SUBJECT  :    Employment:  wages and hours:  overtime

           SOURCE  :     California Employment Lawyers Association
                      California Teamsters Public Affairs Council
                      

           DIGEST  :    This bill 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.

           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: 
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           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.  (Labor Code Section 515(d))
           
           This bill provides further clarity as to what hours and 
          rate of pay a salaried employee is being compensated for 
          when receiving his/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

          Arechiga v. Dolores Press  .  Under existing law, overtime 
          wages are required to be paid to a nonexempt employee for 







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          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).  ÝLabor Code Section 
          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, Arechiga and his employer 
          orally agreed he would work 11 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 Section 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.  

          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 







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          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 United States 
          Supreme Court 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.  

           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 
          Section 515 does not outlaw explicit mutual 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.  







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          According to the DLSE, explicit written wage agreements are 
          not allowed since the enactment of Labor Code Section 
          515(d) ÝAB 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. 

           FISCAL EFFECT  :    Appropriation:  No   Fiscal Com.:  Yes   
          Local:  Yes

           SUPPORT  :   (Verified  6/25/12)








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          California Employment Lawyers Association (co-source)
          California Teamsters Public Affairs Council (co-source)
          AFSCME
          California Conference Board of the Amalgamated Transit 
          Union 
          California Conference of Machinists 
          California Labor Federation 
          California Nurses Association 
          Engineers and Scientists of California, IFPTE Local 20, 
          AFL-CIO
          International Longshore & Warehouse Union 
          Professional and Technical Engineers, IFPTE Local 21, 
          AFL-CIO 
          UNITE HERE, AFL-CIO 
          United Food & Commercial Workers, Western States Council
          Utility Workers Union of America, Local 132

           ARGUMENTS IN SUPPORT  :    According to the author's office,  
          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 Section515 (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. 


           ASSEMBLY FLOOR  :  51-24, 5/7/12
          AYES:  Achadjian, Alejo, Allen, Ammiano, Atkins, Beall, 







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            Bill Berryhill, Block, Blumenfield, Bonilla, Bradford, 
            Buchanan, Butler, Charles Calderon, Campos, Carter, 
            Cedillo, Chesbro, Davis, Dickinson, Eng, Feuer, Fong, 
            Fuentes, Galgiani, Gatto, Gordon, Gorell, Hayashi, Roger 
            Hernández, Hill, Huber, Hueso, Huffman, Lara, Bonnie 
            Lowenthal, Ma, Mendoza, Mitchell, Monning, Pan, Perea, V. 
            Manuel Pérez, Skinner, Solorio, Swanson, Torres, 
            Wieckowski, Williams, Yamada, John A. Pérez
          NOES:  Conway, Cook, Donnelly, Beth Gaines, Garrick, Grove, 
            Hagman, Halderman, Harkey, Jeffries, Jones, Knight, 
            Logue, Mansoor, Miller, Morrell, Nestande, Nielsen, 
            Norby, Olsen, Silva, Smyth, Valadao, Wagner
          NO VOTE RECORDED:  Brownley, Fletcher, Furutani, Hall, 
            Portantino


          PQ:m  6/26/12   Senate Floor Analyses 

                         SUPPORT/OPPOSITION:  SEE ABOVE

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