Court of Appeal Upholds Explicit Mutual Wage Agreement Doctrine Permitting Non-Exempt Employees To Be Paid A "Salary" If Certain Requirements Are Met

On February 7, 2011, in Arechiga v. Dolors Press, Inc., the California Court of Appeal upheld California’s “explicit mutual wage agreement” doctrine.  “Under that doctrine,” said the court, “an employer and [non-exempt] employee may lawfully agree to a guaranteed fixed salary so long as the employer pays the employee for all overtime at least one and one-half times the employee’s basic rate” so long as the employer and the employee enter into an agreement specifying: (1) the days the employee will work each workweek, (2) the number of hours the employee will work each workday, (3) the specific amount of the salary the employee is guaranteed to be paid, (4) the employee is informed and agrees to the basic hourly rate of pay upon which the salary will be based, (5) the employee is informed and agrees the agreed-upon salary covers the employees straight-time hours and overtime hours, and (6) the agreement is reached before the work is performed.

According to trial testimony Carlos Arechiga agreed to work as a janitor for Dolores Press, Inc., for a weekly salary of $880 per week for 66 hours of work each week (i.e., 40 straight-time hours per week at a straight-time rate of $11.74 per hour and 26 overtime hours each week at an overtime rate of 1 ½ times the straight-time rate or $16.71 per hour). A co-worker and a supervisor testified Mr. Arechiga was jubilant about his pay because his straight time hourly rate was more than double what he was paid at his previous job.

Some three years later, after Dolores Press terminated his employment, Mr. Arechiga filed suit alleging Dolores Press failed to pay him all the wages owed to him. Specifically, Mr. Arechiga contended his $880 weekly salary he received for three years while employed by Dolores Press covered only his straight time wages (at a claimed straight-time rate of $22.00 per hour) and contended Dolores Press owed him overtime wages of $33.00 for each of the 26 overtime hours he agreed to work each week going back three years. The trial court and, ultimately, the Court of Appeal rejected all of Mr. Arechiga’s contentions.

Mr. Arechiga agreed he entered into an agreement specifying (1) the days he would work each workweek, (2) the number of hours he would work each day, and (3) the amount of salary he would be paid each week, but he unsuccessfully contended the other requirements were not satisfied because he did not agree to an hourly straight-time rate of $11.74 and because, among other things, the written agreement he signed did not specify the hourly straight-time rate. The Court of Appeal held the trial court properly admitted evidence that Mr. Arechiga was shown before he signed the written agreement a separate piece of paper specifying his hourly straight-time rate would be $11.74 per hour. The Court of Appeal held also that the trial court properly admitted expert witness testimony to the effect that the median straight-time hourly rate paid to janitors in the Los Angeles area was $7.90 per hour, approximately one-third the $22.00 hourly rate Mr. Arechiga claimed under his interpretation of the agreement at issue.

Mr. Arechiga contended Labor Code Section 515(d), enacted in 2000, outlawed explicit mutual wage agreements for non-exempt employees, such as Mr. Arechiga. Section 515(d) merely states “[f]or 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.”  The Court of Appeal rejected Mr. Arechiga’s proposed interpretation of section 515(d).  Notably, the Court of Appeal expressly rejected the California Division of Labor Standards Enforcement’s interpretation that section 515(d) does forbid such explicit mutual wage agreements, citing the California Supreme Court’s admonishment in Martinez v. Combs (2010) 49 Cal.4th 35, 50, fn. 15, reported here, that “[W]e give the DLSE’s current enforcement policies [as stated in the DLSE’s enforcement manual] no deference because they were not adopted in compliance with the Administrative Procedure Act.”

This case provides two take-aways for employers: First, explicit mutual wage agreements providing for the payment of a “salary” to non-exempt employees are enforceable if they meet the six requirements set forth above. Second, the employer in this case was fortunately able to establish by testimony all of the terms of the explicit mutual wage agreement. However, the employer in this case was fortunate to be able to do that. Witnesses come and go (mostly go), and memories fade. To avoid the sorts of evidentiary challenges and uncertainty the employer faced in this case, California employers wishing to enter into and enforce explicit mutual wage agreements should include all of the required terms of the agreement in a signed written agreement.

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