Can pay, based on hours worked with no guaranteed minimum, be deemed a "salary," making employee exempt from overtime?

May 22, 2013
By Justice Steven Vartabedian (Ret.) on May 22, 2013 6:00 AM |

overtime.jpgCalifornia Labor Code section 515, subdivision (a), sets forth the requirements for determining whether an employee may be classified as exempt from pay requirements including those with respect to overtime: (1) the primary job duties are executive, administrative or professional), (2) the work involves the regular exercise of discretion and independent duties, and (3) the "salary" must exceed twice the minimum wage for full-time employment. More particulars are found in Industrial Welfare Commission (IWC) Wage Order 4.

The issue in the recent case of Negri v. Koning & Associates (published opinion filed 5/16/13) H037804 was whether a payment schedule for plaintiff insurance-claims-adjuster, that allowed him to determine his scheduling/number of hours and compensated him at the fixed rate of $29 per hour regardless of the number of weekly hours (whether below, equal to, or in excess of 40) but did not guarantee a minimum amount of pay per pay-period, qualified as a "salary" within the meaning of requirement (3) above.

The trial court (Santa Clara Superior Court), while factually finding that plaintiff had worked "20 hours of overtime a week," had concluded he was an exempt employee, thus not entitled to overtime pay for those hours exceeding 40 per week. The Court of Appeal, Sixth Appellate District reversed.

The appellate court looked to the "federal salary-basis test" found in the Fair Labor Standards Act as the IWC has construed this test to apply and state requirements need to be at least as protective to the employee as federal standards. Federal law requires that the employee would have to have been paid a predetermined amount that is not subject to reduction based upon the number of hours worked in order to meet the salary basis test. So even though insurance adjuster duties qualify for the administrative exemption, the employee must have received compensation on a "salary" basis as specified.

Even if plaintiff Negri always had enough work to occupy him for 60 hours per week and in fact was always paid for that many hours at the regular rate of pay, the amount he received was "subject to" reduction, which meant his pay was not a salary. This distinguishes Negri from the situation of exempt teacher-employees in Kettenring v. Los Angeles Unified School Dist. (2008) 167 Cal.App.4th 507, where, although the teachers' pay was determined by their estimated number of hours, the teachers were paid a predetermined minimum even if their hours fell below their actual hours--they were not subject to receiving less, thus assured a "salary."

I suggest that employers and their counsel be aware that even if in fact an employee has been paid a seemingly adequate minimum hourly-based "salary," if it is not a guaranteed minimum salary (meaning not "subject to" reduction below 40 hours), the "salary" requirement for exemption from having to pay overtime premiums may not be satisfied. And as employment counsel know all too well, a violation of overtime laws causes a chain reaction of potential other Labor Code violations.

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