California Appeals Decision Confirms Salary Agreements for Hourly Employees That Foreclose Overtime Claims

A February 7, 2011 California Court of Appeal decision permits explicit written salary wage agreements for hourly workers that include overtime compensation within that set weekly amount.

In Arechiga v. Dolores Press, a former employee sued for alleged unpaid overtime.  Working as a janitor, Arechiga had verbally agreed to work 11 hours a day, six days a week (a total of 66 hours per week).  Thus, he asserted the company owed him overtime for the 26 hours he worked over the 40 hour/week threshold for regular pay.

However, Arechiga also entered a written agreement with the company stating he would be paid a weekly salary of $880 for his labor.   The court held that California law (Labor Code section 515) does not outlaw “explicit mutual wage agreements” in which an hourly employee such as Arechiga and the employer establish a set salary that will include basic wage and overtime pay and in which the overtime component is at least one and one-half times the basic rate.

As Arechiga had a set schedule, the court found that the parties had intended to divide his $880 weekly compensation to cover all those hours, including $445.60 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).

The decision confirms that employers and hourly employees may negotiate for written “explicit” set salary agreements to cover work schedules that would render the worker eligible for overtime.

As the Arechiga decision carries several fine points, California businesses should proceed deliberately and with the aid of knowledgeable legal counsel in creating and entering such written agreements with any hourly worker.  The risk of an inadequate agreement could be liability for additional overtime compensation that could reach back for up to four years of payroll.