No Exemptions–Employers Must Pay Overtime to Employees Who Do Not Earn a “Salary”

In California, not all employees are created equal—at least insofar as overtime pay is concerned. Specifically, “exempt” employees are not entitled to overtime pay whereas “non-exempt” employees must be paid time-and-a-half for work in excess of eight hours per day or forty hours per week.

In addition to a “duties” test (primarily engaged in executive, administrative, or professional duties), an employee is considered “exempt” if he or she also “earns a monthly salary equivalent to no less than two times the state minimum wage for full-time employment.” Is this “salary” requirement satisfied when an employee is compensated based solely on the number of hours worked—with no guaranteed minimum, but in practice always works at least 60 hours per week and is always paid no less than the equivalent of $29 per for 40 hours each week ? Despite creative arguments by the employer (which convinced the trial court), however, the fact that there was no guaranteed amount means the employee does not earn a “salary” and cannot be considered an “exempt” employee under California law.

Claims Adjuster Works as Much as He Wants

Mark Negri is an insurance claims adjuster who was employed by Koning & Associates. He made his own schedule, was not supervised in the field by a manager, and spent the majority of his work hours “recording and tabulating data” and “transmitting that data to insurance carriers.”

Each month, Mr. Negri provided Koning with a ledger listing all of the hours he billed and for which he should be paid. Koning paid him $29 per hour for every hour he worked. If Mr. Negri worked more than 40 hours per week, he still received $29 per hour. There was no minimum number of hours guarantee. In practice, Mr. Negri actually worked (and was paid for) an average of 60 hours each week during all 66 weeks he worked for Koning. He was always paid more than twice minimum wage during each work week.

Mr. Negri sued Koning seeking overtime pay. In denying liability, Koning argued that Mr. Negri was not entitled to overtime payments because he was an exempt employee. The trial court agreed with Koning, basing its finding of exempt status on several federal court decisions where those courts looked at similar claims adjuster duties and found them to be exempt.

What is a “Salary”?

The court of appeal determined Mr. Negri was not an exempt employee under California law. The court first dismissed the trial court’s reliance on the federal court decisions concerning claims adjusters because those only looked at the duties to see if those were exempt and did not consider the salary basis requirements. The court then scrutinized the term “salary” and determined that it refers to a specific form of compensation, implying something other than an hourly wage. The California regulation discussing the “salary” requirement (Wage Order 4) could have used a more generic term such as “compensation” or “pay,” but did not do so.

Plaintiff Did Not Earn a “Salary”

In arguing that Mr. Negri earned a “salary,” Koning relied on an earlier Court of Appeal decision where the court considered whether teachers were being paid a “salary” when their compensation was based on the number of classroom hours taught, multiplied by a flat rate. Koning argued Mr. Negri was essentially like the teachers in that case because—even though he was paid by the hour—he always had enough work to occupy him for sixty hours per week. As a result, his compensation did not vary. The court rejected Koning’s argument, because unlike Mr. Negri, the teachers’ pay was not “subject to” reduction. Instead, the teachers were paid a pre-determined rate regardless of how many hours they actually worked.

The court did acknowledge that in practice, Koning always paid Mr. Negri the equivalent of $29 per hour for forty hours per week, such that he always received a minimum amount of pay. The court also acknowledged that exempt employees can be paid extra money for extra work without losing their exempt status. The court noted, however, that Koning had stipulated it never paid Mr. Negri a “guaranteed” salary. Accordingly, because Mr. Negri’s compensation could theoretically be subject to reduction, his compensation could not be considered a “salary.” The court had no choice except to conclude that Mr. Negri was a non-exempt employee. Negri v. Koning & Associates (California Court of Appeal, Sixth Appellate District, 5/16/13)

The Bottom Line

In determining whether an employee is exempt or non-exempt, employers must not only consider the type of work an employee predominantly performs (e.g., executive, professional, or administrative), but also how the employee is paid. To avoid losing an exempt status, employers should ensure all exempt employees are paid a pre-determined minimum amount that is not subject to reduction based on the quality of the work or the number of hours worked. And, of course, that minimum amount must be more than twice the minimum wage. Any scheme that involves hourly pay but no daily or weekly overtime will be carefully scrutinized and the employer will have the burden of justifying the exemption.

(Originally authored by Ms. Clancy and published in the California Employment Law Letter.)