Employers are more likely to pay large damages awards when they choose to pay employees a salary. Moreover, employees are more likely to miss breaks and the associated health and safety benefits on a salary.
Employment law, particularly California employment law, is a field with requirements that change every single year. These requirements can be hard to understand and it can be hard to keep up with the changes to these requirements.
We are all familiar these days with the concept of ‘defensive driving’—driving to protect yourself and minimize your risk no matter what the crazy person next to you is doing. Employers should practice ‘defensive wages’—pay people while anticipating that there will be issues and minimize the risk for when those issues arise. The problem with employment law is that you cannot see that your decision to pay an employee a salary is the legal equivalent of playing chicken with the semi-truck on a one lane highway—everything is fine until there is suddenly a very large problem.
Many employers would ask, “why is paying salary an issue?” There are good reasons to ask this question. Employees often like the consistency and reliability of a fixed pay check. They can pre-plan their expenses and have a sense of security with a salary. Employers also like to pay by salary. In addition to a similar ability to manage their overhead and anticipate wage costs, employers also tend to believe that a salaried employee is not entitled to overtime or breaks. Unfortunately for the employer, an employee is entitled to overtime and breaks unless they are exempt—it is not enough to just be paid a salary. Exemptions are defined in several places, though usually in a Wage Order. The scope of the possible exemptions are outside the scope of this article, but for a rule of thumb, many exemptions require both that the employee be engaged in certain specified duties and that the employee earn at least a certain multiple of the minimum wage (often twice the minimum wage). As a handy reminder, if the employer has 25 or more employees in 2019 and the employer is paying its salaried employee less than $49,920, then that employee likely does not meet the exemption, and the employer is likely inviting litigation for a variety of improper pay practices. The salary pay is often itself a trap that creates the problems.
More significantly, even if the employer makes the same mistake for an hourly and salaried employee (say, failure to pay overtime), the employer will pay far more in damages to the salaried employee when they are eventually sued than if the employer paid the exact same amount of wages to the employee as hourly wages. This is because of Labor Code § 515(d) which has two very impactful parts: (1) For the purpose of computing the overtime rate of compensation required to be paid to a nonexempt full-time salaried employee, the employee’s regular hourly rate shall be 1/40 th of the employee’s weekly salary” and (2) “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 contrary.” This means that the salaried employee will generally be owed a higher overtime rate and that, no matter how well the salaried employee is paid, the nonexempt salaried employee is treated by the law as though they were not paid anything for all work over 40 hours in a week or 8 hours in a day.
An illustration is useful in understanding how quickly this becomes an issue. Consider an employee who works 45 hours per week for a year if that employee was paid hourly versus paid a salary (note: this is very rough math).
|Hourly Employee||Salary Employee|
|Pay Rate||$12/hour||$28,080 salary|
|Total Hours Worked||2340||2340|
|Amount Actually Paid||$28,080||$28,080|
|Total Overtime Hours||240||240|
|Unpaid Overtime Premium||$1,440||$1,620|
|TOTAL (not counting penalties)||$1,440||$4,860|
As the above demonstration reveals, the salary employee will be owed significantly more. This is amplified as the salary at issue gets higher. Notably, this leaves out a significant number of penalties that are likely associated, including waiting time penalties, wage statement violations, potential missed breaks, attempts at Private Attorneys General Act (PAGA ) claims, and others.
There are benefits to employees and employers when pay is by the hour. Unless you are certain about your review of the applicable exemptions, paying by the hour is likely to create fewer wage mistakes and minimize the penalty for those wage mistakes—helping to avoid costly litigation.
We help employees who have not been properly paid collect their owed wages. We also help employers avoid those mistakes in the first place and navigate through the litigation when something does go wrong. But for now, when in doubt, stick to hourly pay.