California law requires that all nonexempt employees working more than eight hours in a workday or after 40 hours in a workweek, are required to be paid overtime. Nonexempt employees are typically paid an hourly rate of pay, making the calculation of overtime relatively simple (1.5 x regular rate of pay.) Conversely, there is no restriction from paying a nonexempt employee on a salary rather than hourly basis, as long as there is compensation for overtime work. Determining the regular and overtime rates of pay is more challenging in salaried employees as opposed to hourly employees. A recent amendment of Labor Code section 515 will provide that payment of a fixed salary to nonexempt employees provide compensation only for an employee’s regular, non-overtime hours.

The bill is centered around a recent court decision where an employer attempted to use an “explicit mutual wage agreement” which provided a fixed salary to compensate the employee for all regular and overtime hours worked. (Arechiga v. Dolores Press (2011) 192 Cal.App.4th 567.) In Arechiga v. Dolores, a janitor and his employer agreed to be paid a fixed salary of $880 a week in compensation for 66 hours of work each week. On appeal, the court held that this payment method was proper under California overtime law and no additional overtime compensation was owed. This ruling created a “slippery slope” because it gave employers the ability to estimate overtime and include it in a fixed salary. This opened the door to the likelihood of employees working overtime hours without being properly compensated.

The court in Arechiga relied heavily on a few federal cases interpreting the Fair Labor Standards Act (FLSA), which is atypical for California’s Legislature since it had never followed the FLSA in regards to wage-law. Arechiga failed to follow the plain language of Labor Code section 515(d) which provided for the manner in which to compute overtime (1/40th of employee’s weekly salary). This case had a detrimental effect making the law much more confusing for employers and employees than it needed to be.

In sum, this new legislation will restore the rights of nonexempt workers by ensuring that overtime is calculated separately. This will be beneficial to both employers and employees alike. Records will clearly show for both parties what hours are part of a regular workweek and what is overtime.