California law generally requires the payment of overtime to non-exempt employees for hours worked over 8 in one workday, and over 40 in one workweek, and on the 7th day of the workweek. The calculation is straightforward for non-exempt employees paid only an hourly wage. But some employers pay hourly employees a fixed salary, such as $1k per week or $50k per year.
AB 2103 (link) clarifies that such a fixed salary can only be deemed to be compensation for the employee's regular non-overtime hours. Accordingly, the hourly rate for a non-exempt full-time salaried employee must be 1/40th of the employee's weekly salary. Employers may not enter into private agreements to the contrary. AB 2103 specifically overturns Arechiga v. Dolores Press, 192 Cal. App. 4th 567 (2011), in which the Court of Appeal held a private wage agreement between the employer and employee, paying the employee a fixed salary for 66 hours of work each week was okay, and that the employee was not owed any further overtime.
Therefore, AB 2103 will only impact employers who:
- Pay non-exempt employees a fixed salary instead of an hourly wage; and
- Have tried to include overtime in that fixed salary.
Paying non-exempt employees a fixed salary is confusing and can cause many problems.
First, the employer still needs to convert that salary to an hourly wage for purposes of overtime. So why not just give the hourly rate to begin with? Simply state in the offer letter that the annual salary is a "target salary" of $50k per year, which equates to $24 per hour, with a caveat that the employee's actual earnings may vary based on hours worked. That is much more accurate.
Second, employers also get into trouble with salaried non-exempt employees if they fail to keep adequate time records. Remember, if the employee is non-exempt there is still a requirement to keep records of hours worked meal breaks taken.
Finally, the paystub needs to be accurate too. Rather than a fixed salary on the stub, it should list the hourly rate and the hours worked. For the example above it should list 40 hours at $24 per hour.
Bottomline, paying a non-exempt employee a fixed salary is an invitation to unintended pay errors, which is never a good thing – especially in California.