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California Court Rules Employer Not Required to Pay Overtime under Explicit Mutual Wage Agreement

  • February 24, 2011

A California employer did not owe overtime to an employee because it had entered into an explicit mutual wage agreement that provided for base compensation and overtime in one lump sum, the California Court of Appeal has ruled.  Arechiga v. Dolores Press, Inc., No. B218171 (Cal. Ct. App. Feb. 7, 2011).  Affirming the dismissal of the employee’s claim, the Court upheld the validity of explicit mutual wage agreements for non-exempt employees under California law.

The Facts

Carlos Arechiga worked as a janitor for Dolores Press, Inc. He and DPI orally agreed that he would work 11 hours a day, six days a week, for a total of 66 hours per week, consisting of 40 straight-time hours and 26 overtime hours.  DPI paid Arechiga a lump sum of $880 a week. Arechiga and DPI later entered into a written employment agreement stating that Arechiga would be paid a “salary/wage of $880.00.”

After DPI terminated Arechiga’s employment, Arechiga sued DPI for alleged unpaid overtime, asserting that his salary of $880 per week was for 40 hours at an hourly rate of $22 and that DPI owed him overtime pay at a rate of $33 per hour for the additional 26 hours he worked per week.
At trial, DPI argued that it did not owe Arechiga overtime because the parties had entered into an explicit mutual wage agreement under which Arechiga’s salary compensated him for all hours worked based on a regular hourly wage of $11.14 and an overtime wage of $16.71.  Arechiga argued that he did not agree to an hourly wage of $11.14 and that, in any event, the California Labor Code prohibited such agreements.  The trial court disagreed with Arechiga and entered judgment for DPI.  Arechiga appealed.

Explicit Mutual Wage Agreement is Valid

Under California law, a valid explicit mutual wage agreement “requires an agreement which specifies the basic hourly rate of compensation upon which the guaranteed salary is based before the work is performed, and the employee must be paid at least one and one-half times the agreed-upon rate for hours in excess of forty.” 
Arechiga argued that he did not explicitly agree to an hourly wage of $11.14.  However, based on the testimony at trial, his supervisor informed him of his hourly rate when Arechiga was hired.  Another supervisor testified that Arechiga was “jubilant” about his hourly rate because it more than doubled the wage he previously had earned.  Thus, the Court rejected Arechiga’s contention and found that DPI had offered sufficient evidence establishing that the parties entered into an explicit mutual wage agreement.

Arechiga then argued that Section 515(d) of the Labor Code prohibited explicit mutual wage agreements for nonexempt employees based on the Division of Labor Standards Enforcement’s Enforcement Policies and Interpretations Manual.  The Court rejected Arechiga’s argument, noting that the DLSE’s Manual was “non-binding” on the courts because it was not properly adopted under the Administrative Procedures Act.  Further, California case law recognized such agreements for non-exempt employees.  Accordingly, the Court concluded that explicit mutual wage agreements remained valid under California law and that the trial court properly upheld the parties’ agreement.

Implications for Employers

This decision validates the use of explicit mutual wage agreements for non-exempt employees.  However, such agreements should be entered into carefully and employers should work with counsel to ensure that they comply with applicable law.  Among other things, explicit wage agreements must be reached before any work is performed; must state the hourly rate on which the salary is based and that the employee will be paid a guaranteed salary of a specific amount that will cover both regular and overtime hours.  Jackson Lewis attorneys are available to assist employers with this and other workplace issues.

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