A recent California Court of Appeals ruling delivers some good news to employers looking for a shield to deflect overtime claims by salaried nonexempt employees. The court concluded that explicit mutual wage agreements that provide a fixed guaranteed salary are valid under California law—as long as the employee receives at least 1.5 times the regular pay rate for overtime.

Agreement Provides Salary
“Archibald” began working as a janitor for San Francisco-based Dolores Press, Inc. (DPI), in January 2000. He and DPI orally agreed that he would work 11 hours a day, 6days a week, for a total of 66 hours each week. Because Archibald was a nonexempt employee, they agreed that his schedule meant he earned 26 hours of overtime pay each week. DPI paid him a total of $880 per week.

In October 2003, Archibald and DPI signed a written employee separation agreement (apparently to terminate the original oral agreement) and a subsequent written employment agreement. The latter didn’t change the terms of employment and specified that “Employee shall be paid a salary/wage of $880,” with the word “salary” circled.

Employee Sues for Overtime
DPI terminated Archibald in September 2006. In November 2007, he sued the company, seeking overtime pay. Archibald claimed that his written employment agreement was covered by California Labor Code Section 515(d). This provision states that for purposes of computing the overtime rate due to a nonexempt full-time salaried employee, the regular hourly rate is 1/40th of the employee’s weekly salary.

Archibald contended that his $880 salary compensated him for only a regular 40-hour workweek, at an hourly rate of $22 per hour ($880/40 hours), and didn’t include his regularly scheduled 26 hours of overtime. DPI asserted that the $880 represented 40 hours of straight time at $11.14 per hour plus 26 hours of overtime at $16.71 ($11.14 x 1.5).

The trial court decided in DPI’s favor. It held that the written employment agreement was an explicit mutual wage agreement under which the fixed salary of $880 lawfully compensated him for both his regular and overtime work. Archibald appealed.

What the Court Said
The “explicit mutual wage agreement” doctrine permits an employer and employee to lawfully agree to a guaranteed fixed salary as long as the employer pays the employee for all overtime at a minimum of 1.5 times the regular hourly rate. On appeal, however, Archibald argued that Section 515(d) prohibits explicit mutual wage agreements. But the Court of Appeals noted that current California jury instructions acknowledge explicit mutual wage agreements, and federal district courts in California have also acknowledged the continued viability of the doctrine.

To support his position, Archibald also cited the Division of Labor Standards (DLSE) enforcement manual, which states that explicit mutual wage agreements are “no longer allowed as a result of the specific language adopted by the Legislature” in Section 515(d). According to the manual, “to determine the regular hour rate of pay for a nonexempt salaried employee, one must divide the weekly salary paid by no more than 40 hours.”

The Court of Appeals, though, observed that the California Supreme Court last year (in Martinez v. Combs) declined to give the policies in the manual “any deference” because they have never been properly adopted by regulators—making them nonbinding on courts. Arechiga v. Dolores Press, Inc., Calif. Court of Appeals (Dist. 2) No. B218171, (2011).

What You Can Do
Explicit mutual wage agreements provide a useful vehicle for employers to protect themselves from unfounded overtime claims by nonexempt salaried employees—but not just any such agreement will satisfy the courts. To be valid, an explicit mutual wage agreement must be reached before any work is performed and must specify:

• the days that the employee will work each week
• the number of hours the employee will work each day
• that the employee will be paid a guaranteed salary of a stated amount
• the regular hourly compensation rate on which the guaranteed salary is based
• that the employee will be paid at least 1.5 times the regular hourly rate for hours worked in excess of 8 per day and 40 per week
• that the guaranteed salary covers both regular and overtime hours

Practice Tip: An explicit mutual wage agreement can help you defend against a claim for overtime pay, but you must be sure the agreement satisfies all necessary criteria.