In an unexpected and somewhat startling ruling, California’s Second District Court of Appeal held earlier this year that an employer and its employee may agree that a fixed salary compensates the employee for both regular hours and overtime hours worked. The ruling seems to pave the way for employers to use such “explicit mutual wage agreements” to control overtime expenses and better predict and manage labor costs overall. But is it the panacea it appears to be?
California employers, sued for overtime violations stemming from their misclassification of employees as exempt, have learned the hard way that paying nonexempt employees on a “salary” basis can dramatically increase overtime liability. Merely paying a high salary not specifically tied to hours worked does not excuse the payment of overtime. Indeed, that high salary increases the hourly rate that is used as the basis for calculating overtime rates because a salaried, nonexempt employee’s hourly rate is computed by dividing the weekly salary by 40. It does not take “Watson-the-Supercomputer” to determine that the larger the salary paid to the nonexempt employee, the greater the “ regular rate of pay,” and the greater the amount of overtime pay owed. While employers often prefer the convenience of paying a flat amount, and some employees prefer to be known as salaried rather than hourly workers, California law has not traditionally allowed this mutual interest in a salary arrangement to immunize the employer from overtime liability.
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