Disagreeing with the California Labor Commission, a California Court of Appeal upheld the trial court’s decision that explicit mutual wage agreements which include straight time and overtime components are enforceable under California law. The Court affirmed that Labor Code section 515(d) does not outlaw explicit mutual wage agreements of this kind. In Arechiga v. Dolores Press, Inc., a janitor sued his former employer for overtime wages. The trial court dismissed the claim, finding that an explicit mutual wage agreement existed between the employee and the employer under which the employee’s fixed salary of $880 lawfully compensated him for both his regular and overtime work based on a regular hourly wage of $11.14 and an overtime wage of $16.71. Following his termination, Arechiga claimed that Labor Code section 515 governed his employment agreement. Citing subdivision (d) of the statute, Arechiga asserted that the Court must find that his salary of $880 compensated him only for 40 regular hours per week thus making his regular rate of pay $22 per hour and his overtime rate $33 per hour. He then argued that his employer owed him overtime at $33 per hour for his regularly scheduled 26 hours of overtime worked each week. Arechiga pointed to the express language of section 515(d) to support his argument. Subdivision (d) states: “For the purpose of computing the overtime rate of compensation required to be paid to the non-exempt full-time salaried employee, the employee’s regular hourly rate shall be 1/40th of the employee’s weekly salary.” 

In reaching its decision, the Court of Appeal rejected earlier case law and Labor Commissioner guidance which disallowed such explicit mutual wage agreements. The Court explicitly rejected reliance on the Labor Commissioner’s Enforcement Policies and Interpretations Manual of the Division of Labor Standards Enforcement because that enforcement manual was not properly adopted and thus is nonbinding on California Courts. It is also found that section 515(d)’s language did not preclude such agreements.

Caution: The Arechiga case also lays out specific elements that such an express mutual wage agreement must contain in order to make them enforceable. 

Take Away: This is an important decision for California employers. It establishes Court of Appeal precedent that the Labor Commissioner’s longstanding interpretation of 5.15(d) and its repudiation of such express mutual wage agreement are no longer controlling. However, to ensure an agreement is enforceable, employers should work with their employment counsel before entering into one with their employees.