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California Legislature Moves to Limit Non-Exempt Employee Contracts

By Adam Abrahms

Outside of California, employers frequently enter into agreements with non-exempt salaried employees that provide for a set weekly salary that includes overtime for a specific number of hours and is based on a defined regular rate of pay.  For example, an employer may agree to pay an employee as salary of $850 a week for 45 hours of work resulting in the employee being paid $20/hour for the first 40 hours and time and half ($30) for the overtime hours.  These agreements typically provide that if an employee works more than the established hours, the employee would be paid additional overtime pay for each hour worked.  If an employee works fewer the hours specified, he or she is generally still guaranteed the full weekly salary, including the built-in overtime.

Such agreements are often referred to as Belo contracts after the US Supreme Court case Walling v. Belo, 316 U.S. 624 (1942), which validated these types of non-exempt salary agreements under federal law.  Regardless of the form such agreements, they are often viewed favorably by both employers and employees as they provide both parties predictability and consistency.

Notwithstanding the federal approval of these arrangements, the California Division of Labor Standards Enforcement has long viewed Belo contracts as contrary to California law.  See  DLSE Opinion Letter 2000.09.29.  Nevertheless, some California employers (including many in the entertainment industry) continued to use these type of non-exempt salary agreements.

Last year, a California Court of Appeal upheld a similar agreement, which seemed to indicate that it would be safe for California employers to enter into what California courts have called “explicit mutual wage agreements” with their salaried non-exempt employees.  Specifically, in validating an explicit written agreement for an employee to work 66 hours a week for a fixed weekly salary of $880 (resulting in a regular rate of $11.14 and overtime rate of $16.71), the court held that “although parties may not waive overtime protections, the law permits an employer and employee to enter into an explicit mutual wage agreement” that provides a guaranteed salary and provides for at least one and on-half times the regular rate for any overtime hours.   Arechiga v. Dolores Press, 191 Cal. App. 4th 567, 573 (2011).

California Assembly Bill 2103 authored by Assemblyman Tom Ammiano (D – San Francisco) seeks to legislatively overturn Dolores Press.  The proposed law would invalidate all explicit mutual wage agreements or Belo contracts in California and would provide that any salary paid to a non-exempt employee be considered payment only for non-overtime hours (i.e. first 8 hours in any day or 40 hours in a week).  Any hours an employee works beyond 8 in a day or 40 in a week would require additional pay at time and a half the regular rate.  Under the proposed legislation, regardless of any written agreement to the contrary, the regular rate would have to be calculated by dividing the established salary by 40.  Had the proposed legislation been in effect in the Dolores Press case, the $880 a week salary Dolores Press mutually agreed upon with its employee would have resulted in the employer having to pay a total of $1,738 a week — or almost double the amount of the agreement.

AB 2103 cleared a major hurdle last week, passing the California Assembly by a 51-24 vote.  It now heads to the State Senate and, if it passes that body, to Governor Brown for signature.

If AB 2103 becomes law, it will become yet another explicit difference from federal law that employers in California will need to adapt to.  It may also require a restructuring of pay practices in the entertainment and other industries that frequently make use of “day rate” or “weekly rate” agreements that build in overtime.