An employee paid the same amount based on an hourly rate did not receive a “salary” under the state’s labor code and was therefore not an exempt employee, according to the California Court of Appeal.

Mark Negri worked as an insurance claims adjustor for Koning & Associates for over one year. During that time period, he was paid $29 per hour with no minimum guarantee. If he worked more than 40 hours per week, he still received $29 per hour.

Seeking unpaid overtime pay, Negri sued Koning alleging violations of the California Labor Code. The company denied Negri was owed overtime because he was classified as an exempt employee and was essentially paid on a salaried basis. A trial court agreed, dismissing the suit.

Focusing on the compensation prong of the exemptions set forth in Industrial Welfare Commission Wage Order 4, the court said no question existed that the amount Negri was paid exceeded the minimum amount required for exemption (a monthly salary equivalent to no less than two times the state minimum wage for full-time employment).

Instead, the court asked whether the manner in which Negri was paid qualified as a “salary” with the meaning of Wage Order 4. The panel turned to the Fair Labor Standards Act to define the term, noting that 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.’”

Because he was not paid a guaranteed salary, if Negri had worked only a handful of hours in a given week, his compensation may have fallen below the requirement that it be more than double the minimum wage, he argued. That hypothetical was irrelevant, Koning contended, because Negri was always paid for at least 40 hours each week and therefore, no “actual reduction” occurred based on the quantity worked.

But Negri’s pay varied according to the amount of time he put in, the court said – he was not paid a predetermined amount. “He was not paid a salary,” the court concluded.

“We recognize that, in practice, defendant always paid plaintiff the equivalent $29 per hour for 40 hours per week so that he, in effect, received an unvarying minimum amount of pay,” the court said. “We also recognize that, as a general matter, an exempt employee may be paid extra for extra work without losing the exemption. The problem here is that defendant stipulated to the fact that it ‘never paid [plaintiff] a guaranteed salary’; if he worked fewer claims ‘he made less money than if he worked more claims.’ That is the same thing as saying that plaintiff was not paid ‘a predetermined amount’ that ‘was not subject to reduction based upon the quantity of work performed.’”

To read the decision in Negri v. Koning & Associates, click here.

Why it matters: The decision provides a cautionary tale for employers: to establish that an employee is exempt, he or she must be paid a predetermined amount that is equivalent to no less than twice the California minimum wage (currently $8.00 per hour). Absent a predetermined amount, an employer may be liable for unpaid overtime which could quickly add up. In the Negri case, the plaintiff claimed he worked an average of 20 hours per week of overtime over a 19-month period, which could lead to more than $60,000 in unpaid overtime.