Wage & Hour Counsel : Wage & Hour Lawyer & Attorney : Littler Mendelson Law Firm : Employment Law, Labor Relations

By Brian Dixon

The favorable outcome for some employers in Arechiga v. Dolores Press, 192 Cal. App. 4th 567 (2011), which we previously discussed, has been undone by the California Legislature. In Arechiga, a California Court of Appeal ruled that a non-exempt employee’s salary could provide compensation for more than 40 hours of work in a week. This result, however fortuitous for employers, was difficult to reconcile with section 515(d) of the California Labor Code, which stated in fairly specific terms that the hourly rate of a salary-paid, non-exempt employee was the salary divided by 40. Whatever latitude there may have been for the conclusion reached by the court in Arechiga under the statute has been banished by Governor Brown’s signing Assembly Bill  2103 into law on September 30, 2012. That bill adds section 515(d)(2) and slightly revises section 515(d)(1) of the Labor Code with the stated intent to overrule Arechiga. Section 515(d)(2) now states that “Payment of a fixed salary to a nonexempt employee shall be deemed to provide compensation only for the employee’s regular, non-overtime hours, notwithstanding any private agreement to the employer.” For the typical non-exempt employee, section 515(d)(2) will mean that any salary will not extend beyond providing compensation for five, eight-hour days per week. The amendments to the Labor Code will take effect January 1, 2013. 

Photo credit: Asilvero

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The California Legislature was active this past session. As a result, numerous wage and hour laws have been enacted that will take effect January 1, 2013. Highlights include:

• Revised provisions concerning penalties for wage statement violations.
• Increasing the amount of wages that are exempt from wage garnishment.
• Specifying that fixed salaries paid to non-exempt employees only provide for an employee’s regular, non-overtime hours, regardless of the parties’ agreement.
• Additional wage statement and Wage Theft Prevention Act notice requirements for temporary services employers.

To learn more about these and other new California laws, please see Littler’s ASAP, What's New? California's Major 2012 Employment Laws Affecting Private Sector Employers, by Christopher Cobey and Tomomi Glover.

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By Robert Pritchard

In a pair of recent decisions, the United States District Court for the Western District of Pennsylvania held that the “fluctuating workweek” method of calculating overtime is not lawful under Pennsylvania law when the employer pays an overtime premium of one-half of the employee’s regular hourly rate, in addition to the employee’s salary. Foster v. Kraft Foods Global, Inc., 2012 U.S. Dist. LEXIS 121282 (W.D. Pa. Aug. 27, 2012); Cerutti v. Frito Lay, Inc., 777 F. Supp. 2d 920 (W.D. Pa. 2011). While these cases do not necessarily represent the last word on the subject (indeed, the Foster case is still pending in district court), employers who utilize the fluctuating workweek method in Pennsylvania should take note of these developments.

Under federal law, the fluctuating workweek method allows an employer to pay an employee a fixed weekly salary for all hours worked, so long as the employer also pays an overtime premium equal to one-half of the employee’s regular hourly rate for hours worked in excess of 40 per week. In order to determine the employee’s regular hourly rate, the employee’s salary is divided by all hours worked during the week. Because the employee has already been paid (by the salary) at that regular rate for all hours worked (including the overtime hours), the employee is only owed an additional “one-half” the regular rate for the overtime hours. This method of calculating overtime is expressly authorized under the federal Fair Labor Standards Act (FLSA). 29 C.F.R. § 778.114.

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Carlos Arechiga may have been, as the trial court found, ecstatic when he was first told that he would earn $880 per week as a custodian, but he certainly was dismayed after working six 11-hour days per week for several years and never receiving a separate payment for overtime. Arechiga was undoubtedly more dismayed when the California Court of Appeal, in Arechiga v. Dolores Press, affirmed the trial court’s conclusion that his salary included his overtime compensation and he was due no additional wages. The Court of Appeal concluded that Arechiga’s employer had sufficiently spelled out the six factors needed to have, under California law, an enforceable wage agreement that included all required overtime. Perhaps surprisingly, the Court of Appeal also ruled that the wage agreement prevailed over section 515(d) of the Labor Code, which seemingly outlawed such agreements.

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On February 22, 2011, the U.S. Supreme Court declined to review a decision from the Seventh Circuit Court of Appeals which had approved the use of the “half time” method of computing unpaid overtime compensation in a misclassification case under the FLSA. Urnikis-Negro v. American Family Property Services, 616 F.3d 665 (7th Cir. 2010), cert. denied, No. 10-745 (Feb. 22, 2011).

Pursuant to the “half time” method, when an employee agrees to receive a fixed weekly salary as payment for all hours worked, the employee’s “regular rate” for any particular workweek is determined by dividing the employee’s weekly salary by the number of hours actually worked in that week. If it is later determined that the employee was misclassified as exempt, the amount of unpaid overtime compensation due for that week is equal to half of the employee’s regular rate times the number of overtime hours worked.
 

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In a collective action under the Fair Labor Standards Act (FLSA), the Tenth Circuit Court of Appeals recently joined the Eighth Circuit and the Department of Labor in holding that sick leave buy-backs are included in the FLSA regular rate, but vacation leave buy-backs are not. Chavez v. City of Albuquerque, No. 09-2274 & 09-2288, 2011 U.S. App. LEXIS 622 (10th Cir. Jan. 12, 2011).

In Chavez, the plaintiffs, 780 former and current employees of the City of Albuquerque, a municipal corporation, filed a multi-count complaint on behalf of themselves and all others who had previously worked or were currently employed, alleging that the City improperly calculated its employees’ wage, overtime, and bonus pay in violation of the FLSA.

After motions for summary judgment and a bench trial, the U.S. District Court for the District of New Mexico ultimately found for the City on all counts save for one – the plaintiffs’ claim that the City failed to include vacation and sick leave buy-backs in its calculation of the FLSA regular rate. On review, the Tenth Circuit agreed with the district court that sick leave buy-backs must be included in the FLSA regular rate, but rejected the court’s finding that vacation buy-backs should also be included. Accordingly, the Tenth Circuit reversed the district court’s finding on this issue and affirmed the rest. 

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On February 10, 2011, the California Court of Appeal for the Second District affirmed summary judgment in favor of Costco Wholesale Corporation (Costco), in Head v. Costco Wholesale Corp., case number B222841, finding that Costco properly calculated the regular rate of pay of its salaried, nonexempt ancillary managers.

In 2001, Costco reclassified its ancillary managers from salaried exempt to salaried non-exempt, using a conversion formula to ensure that their incomes would remain the same after the reclassification. Specifically, Costco calculated the managers’ regular rates of pay using their salaries prior to the reclassification, based upon a 40-hour workweek, which resulted in reduced hourly pay rates for the managers. The reduced hourly pay rates were listed on the managers’ wage statements as their regular rates of pay. Costco then calculated new salaries for the managers based on this regular rate of pay, adding as additional compensation an anticipated five hours of overtime pay per week at the premium rate, as such overtime hours were expected of these employees. The revised salaries were listed on Costco’s internal personnel forms as the managers’ reported salaries. After reclassification, an ancillary manager would receive the revised salary for hours worked up to 45, plus overtime compensation for any hours worked beyond 45 per week.

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In Parker v. NutriSystem, Inc., No. 09-3545 (Sept. 8, 2010), a divided panel of the Third Circuit held a system of flat-rate compensation for each sale that an employee makes may qualify for the retail commission exception to the overtime requirements of the federal Fair Labor Standards Act. In so ruling, the majority rejected the Department of Labor's argument that commissions must be linked to the sales price. To learn more about the decision and its implications for employers, please continue reading Littler's ASAP "Third Circuit Holds that Flat-Rate Commissions May Qualify for Retail Commission Exception to FLSA's Overtime Requirements" by Matthew Hank.

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On July 19, 2010, in Jackson v. Alpharma Inc., the United States District Court for the District of New Jersey held that Alpharma, Inc.’s pharmaceutical sales representatives qualify as exempt administrative employees under the Fair Labor Standards Act (“FLSA”). The court’s unpublished opinion relies in part on the Third Circuit’s holding in Smith v. Johnson & Johnson, 593 F.3d 280 (3d Cir. 2010).

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