Among other overtime premiums, California requires payment of time-and-one-half an employee’s regular rate of pay for time worked in excess of eight hours per workday or 40 hours per workweek.

Recently, a California Court of Appeal held that this overtime requirement could be satisfied by an “explicit mutual wage agreement” pursuant to which a “guaranteed fixed salary” could be set, provided the salary equates to 40 hours of work at an identified hourly rate and to time worked in excess of 40 hours at one-and-one-half times that rate. Arechiga v. Dolores Press, Inc., (2nd App. Dist., Feb. 7, 2011).

As a result, some California employers may consider using “explicit mutual wage agreements.” Seemingly, such agreements would even the amount of pay a non-exempt employee would receive week after week. Instead of pay varying each week depending on the amount of overtime worked, the employer and the employee both could count on one set sum each week.

Unfortunately, even after this decision, the legality of such “explicit mutual wage agreements” is murky. This is because it is not clear whether other California courts will follow the Delores Press decision. Even if they do, the decision did not address the propriety of these agreements under the federal Fair Labor Standards Act. Further, even if such agreements are permissible in the abstract, they would still be problematic unless: (i) the formula for the fixed weekly payment is based upon all applicable state and federal overtime requirements, not just weekly overtime; (ii) the employee does not work fewer hours than covered by the guarantee; and (iii) the employee is paid additional overtime pay for hours worked in excess of those covered by the guarantee.  

Like California law, the federal Fair Labor Standards Act requires one-and-one-half an employee’s regular rate of pay for time worked in excess of 40 hours in a workweek. Time and again, federal courts have held that wage plans under which employers pay a fixed weekly salary for irregular hours violate the FLSA’s overtime requirements. This is true even where the employer can show the fixed salary is the sum of a designated hourly rate for 40 hours plus one-and-one-half that rate for hours over 40.

One narrow exception under the FLSA is a so-called “Belo contract.” A Belo contract allows an employer and an employee to agree on a fixed weekly salary covering regular hours and overtime hours, but it may be used only under the following circumstances: (i) an employee’s duties genuinely necessitate irregular hours of work that vary above and below 40 hours; (ii) the amount of the weekly guarantee covers no more than 60 hours of work; (iii) the number of hours guaranteed (60 or fewer) bears a reasonable relation to the number of hours the employee may be expected to work; and (iv) the guarantee is paid in any workweek, however short, in which the employee performs any amount of work.  

Ironically, California’s Division of Labor Standards Enforcement is of the opinion that Belo contracts are not permitted in California. There are no California court decisions on the subject.

The bottom line is that, in most situations, fixed salaries or guarantees designed to cover both straight-time pay and overtime pay worked by non-exempt employees should be avoided.