BILL ANALYSIS Ó ------------------------------------------------------------ |SENATE RULES COMMITTEE | AB 2103| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ------------------------------------------------------------ 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: CONTINUED AB 2103 Page 2 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 AB 2103 Page 3 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 AB 2103 Page 4 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. AB 2103 Page 5 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) AB 2103 Page 6 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, AB 2103 Page 7 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 **** END ****