The California Legislature has made an important change, effective January 1, 2013, eliminating some of the ability of businesses to negotiate wage arrangements with hourly workers.

In February, 2011, we summarized the Court of Appeal decision in Arechiga v. Dolores 192 California Appellate Reports, 4^th Series (Cal.App.4^th) 567 (2011).  See, “Written Salary Agreements and Overtime.”  The case had upheld the use of so-called “explicit mutual agreements” to establish a salary for hourly workers that included overtime compensation within that set weekly amount.

Thus, the court validated an agreement between Carlos Arechiga and his employer Dolores Press for a $880 salary to cover a 66 hour weekly schedule, with $445.60 allocated to cover the 40 hours of regular time (at $11.14/hour) and $434.46 to cover the 26 hours of overtime (at $16.71/hour, 1.5 x the regular rate).

The new law for 2013, Labor Code 515(d)(2), directly reverses the Arechiga decision.   Now, any salary agreement for a California hourly employee  “shall be deemed to provide compensation only for the employee’s regular, non-overtime hours, notwithstanding any private agreement to the contrary” (emphasis supplied).

On the Arechiga-Dolores Press example above, this means that the $880 salary would now only apply for the worker’s first 40 hours worked in any workweek (and, prorated, to that person’s first eight hours worked in any day).   California law would thus now regard that $880 to equal a regular hourly rate of $22.00/hour ($880 ÷ 40 = $22).  On the 66 hour schedule in the Arechiga case, the employer would be obligated to pay the worker a rate of at least $33.00/hour for every overtime hour or, at minimum, another $858/week, nearly doubling the total $880 amount approved in the above 2011 decision.

It is of course important that California businesses swiftly reevaluate such “explicit mutual agreements” for salaries to hourly employees who work any overtime hours.   Alternatives could include: 1) eliminating the salary arrangement altogether and proceeding with an established straight rate for every hour worked and the premium rate(s) calculated for each overtime hour worked in a given workday or workweek; or 2) setting a new, lower salary amount to cover non-overtime hours only, with overtime hours compensated by the standard formulas.   See also, “Working Overtime in California, Basic Rules and Rates for Weekly or Daily Hours,” and “Calculating Overtime with Employee Bonuses in California.”

For help on how these issues might impact your business, please contact our firm’s attorneys Tim Bowles or Cindy Bamforth.