Whether Belo contracts are permissible under California law

STATE OF CALIFORNIA GRAY DAVIS, Governor

DEPARTMENT OF INDUSTRIAL RELATIONS
DIVISION OF LABOR STANDARDS ENFORCEMENT
LEGAL SECTION
455 Golden Gate Avenue, 9th Floor
San Francisco, CA 94102
(415) 703-4863

MILES E. LOCKER, Chief Counsel

September 29, 2000

Rita Dermenjian
Sagaser, Franson & Jones
2445 Capitol St., 2nd Floor
Fresno, CA 93721-2224

Re: Whether Belo Contracts are Permissible Under California Law

Dear Ms. Dermenjian:

This letter is intended to respond to your inquiry of September 14, 2000, asking whether
"Belo-Type contracts or Guarantee Wage Contracts... are valid under California law."

In Walling v. A. H. Belo Corp., supra, 316 U.S. 624, 62 S.Ct. 1223, the U.S. Supreme Court
refrained from rigidly defining "regular rate" in a guaranteed weekly wage contract that met
the statutory requirements of section 7(a)1 of the Fair Labor Standards Act for minimum
compensation. In the Belo case the contract called for a regular or basic rate of pay above
the statutory minimum and a guaranteed weekly wage of 60 times that amount. As the hourly rate
was kept low in relation to the guaranteed wage, statutory overtime plus the contract hourly
rate did not amount to the guaranteed weekly wage until after 54½ hours were worked. (316 U.S.
at page 628, 62 S.Ct. at page 1225) The Court refused to require division of the weekly wage
actually paid by the hours actually worked to find the "regular rate" of pay and left its
determination to agreement of the parties. Where the same type of guaranteed weekly wages were
involved, the Court has reaffirmed that decision as a narrow precedent principally because of
public reliance upon and congressional acceptance of the rule there announced.

In the Belo case the Court upheld a dual payment system for irregular hours jobs that operated
as follows: By the terms of the employment contract, there existed a specified regular rate
wage

1 Section 7(f) of the FLSA is referred to as the "Belo" provision because Congress added the
provision in 1949 in response to two decisions of the Supreme Court, Walling v. A.H. Belo
Corp., 316 U.S. 624, 62 S.Ct. 1223, 86 L.Ed. 1716 (1942), and Walling v. Halliburton Oil Well
Cementing Co., 331 U.S. 17, 67 S.Ct. 1056, 91 L.Ed. 1312 (1947).

Rita Dermenjian, Esq.
September 29, 2000
Page 2

and overtime pay one and one-half times the regular rate. This regular rate and overtime would
apply to a worker's hours if he worked more than 54 hours in a given week. If he worked 54
hours or less, a fixed amount would be paid that equalled the regular rate plus overtime for
the 54 hours. (62 S.Ct. at 1225-26) As noted above, in 1949 Congress felt it necessary to
specifically approve payment plans (for certain situations) which set a regular rate and
guarantee a fixed rate that is never less than the regular rate plus overtime for the hours
actually worked. See 29 U.S.C. § 207(f).

The California Industrial Welfare Commission never adopted any language which could be
construed as approval of the position taken by Congress or the U.S. Supreme Court. As a matter
of fact, in 1963, the IWC stated:

"In defining its intent as to the regular rate of pay set forth in Section 3(a)(3)(A) and (B)
to be used as a basis for overtime computation, the Commission indicated that it did not intend
to follow the 'fluctuating work week' formula used in some computations under the Fair Labor
Standards Act. It was the Commission's intent that in establishing the regular rate of pay for
salaried employees the weekly remuneration is divided by the agreed or usual hours of work
exclusive of daily hours over eight." (Findings, IWC, 1963)

Thus, of course, not only was the so-called, fluctuating workweek method of calculation
eliminated, but also the Belo Contract method which allows employers and employees to establish
the "regular rate" of pay. Historically, in California, the regular rate of pay must be
determined by use of objective criteria and may not be an artificial sum arrived at by
"agreement" between the parties. With the recent enactment of AB 60 the Legislature specifically
adopted the IWC approach at Labor Code § 515(d):

"For purposes 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 1/40th of
the employee's weekly salary."

Most important, unlike the federal statutory scheme, the California overtime laws rely upon a
"penalty" to discourage the use of overtime. Industrial Welfare Commission v. Superior Court
(1980) 27 Cal.3d 690, 713; Skyline Homes v. Department of Industrial Relations (1985) 165
Cal.App.3d 239, 249. In Belo contracts there is no penalty, simply an arrangement. Like the
fluctuating workweek method of calculation, the more hours the employee works in a workweek
under a Belo contract, the less per hour the individual is making.

Rita Dermenjian, Esq.
September 29, 2000
Page 3

In answer to your inquiry, Belo-Type contracts2 are not allowed in California. This has been
the law for many years. The addition of Labor Code § 515(d) simply codifies the rule.

Thank you for your interest in California labor law. If you have any further questions
concerning this issue, please feel free to contact the undersigned.

Yours truly,

MILES E. LOCKER
Chief Counsel

cc: Arthur S. Lujan, State Labor Commissioner
Thomas Grogan
Roger Miller
Greg Rupp
Nance Steffen
All DLSE Attorneys
Andrew Baron, IWC Executive Officer

2 The term "Guarantee Wage Contracts" is unknown to this office. As applied to Belo contracts
that must be a misnomer since the only thing a Belo contract guarantees is that the employer
does not have to pay overtime to near-minimum wage workers unless they work more than 54½
hours a week.