Is an insurance adjuster who is paid $29 for every hour worked an employee exempt from overtime pay under California law? 

Absolutely not, the California Court of Appeals has ruled. Negri v. Koning & Associates, No. H037804 (Cal. Ct. App. May 16, 2013). The Court determined the insurance adjuster was not paid on a “salary basis” – a fixed, predetermined amount not subject to variation based on the number of hours worked. 

Background

Mark Negri was an insurance claims adjuster for Koning & Associates from May 2004 through October 2005. He was paid $29 per hour per claim with no minimum guarantee. Negri sued Koning for overtime compensation allegedly withheld in violation of the California Labor Code, arguing he was not an exempt employee because he was not paid a guaranteed salary. The trial court entered judgment in favor of Koning, and Negri appealed.

Applicable Law

Under the California Labor Code (Section 515(a)), exemptions from the overtime pay requirement are proper only where “the employee is primarily engaged in the duties that meet the test of the exemption, customarily and regularly exercises discretion and independent judgment in performing those duties, and earns a monthly salary equivalent to no less than two times the state minimum wage for full-time employment.” To qualify as an exempt administrative employee under state Wage Order 4, the employee must earn “a monthly salary equivalent to no less than two (2) times the state minimum wage for full-time employment.” Cal. Code Regs. § 11040(1)(A)(2)(g). The Wage Order does not define “salary.” However, the California Division of Labor Standards construes the Wage Order to incorporate the federal salary-basis test for purposes of determining whether an employee is exempt or nonexempt.

Under the federal Fair Labor Standards Act, an employee is paid on a salary basis if the employee “regularly receives each pay period on a weekly, or less frequent basis, a predetermined amount constituting all or part of the employee’s compensation, which amount is not subject to reduction because of variations in the quality or quantity of the work performed.” An exempt employee must receive the full salary for any week in which the employee performs any work, without regard to the number of days or hours worked.

No Salary, No Exemption

Koning argued that it paid Negri on a salary basis because he always received the equivalent of $29 per hour for 40 hours every week, and his workload kept him occupied for at least 60 hours per week. Thus, the employer argued, Negri’s compensation was not subject to deduction. The appellate court rejected Koning’s argument because Koning never paid Negri a fixed, predetermined amount and stipulated to that fact. That Negri’s workload prevented a deduction from actually happening did not alter the Court’s analysis. It clarified that an employer may pay an exempt employee compensation above the guaranteed minimum without destroying exempt status; however, the employer must establish a guaranteed salary in the first place.

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California employers are reminded that they must establish a guaranteed minimum monthly salary equivalent to no less than twice the California minimum wage (currently, $8.00 per hour) for all exempt employees. Without that guaranteed minimum salary, an employee’s exempt status is subject to challenge, and the potential liability for unpaid overtime can be significant.