Minimum wage issue lurks in background of budget fight

As lawmakers and the governor prepare to rewrite a red ink-stained state budget, a thorny legal question remains up in the air – the forced minimum wage for thousands of state employees.

Right now, a mandatory pay reduction to the federal minimum wage of $7.25 per hour is not in the administration’s bag of budget options — although it has been in the past and may be again. Facing a multibillion-dollar shortage, Gov. Schwarzenegger, a Republican, earlier proposed cutting most state workers’ pay to the minimum until the Legislature approves – and he signs into law – a state budget.

Legal authority for the governor’s action stemmed from a 2003 state Supreme Court decision, in which the Court ruled that the Controller is bound by the state Constitution to withhold payment of wages in the absence of a budget appropriation. That ruling also said federal labor law requires paying federal minimum wage while full wages are withheld.

In 2008, with cash reserves dropping to unprecedented levels, the Governor directed his departments of Finance and Personnel Administration to work with the Controller to implement the minimum wage requirement, the state said.

But when state Controller John Chiang, who signs state checks, refused to comply with the administration’s orders to reduce the pay checks, the administration took him to court – and won. A Sacramento Superior Court, citing the 2003 decision, ruled that Chiang violated the law in refusing to cut the checks. Chiang, a Democrat, appealed the April 2009 decision, and since then, the case has simmered in the 3rd District Court of Appeal.

The appeal effectively halted the administration’s order. The appeals court – which has had the case for nearly a year — has not yet ruled on the issue; in fact, even a hearing has yet to be scheduled.

But the case remains pending, which means the court’s decision could play a major role in the 2010-11 state budget.  State workers, believing the administration again may seek a minimum-wage rule, are concerned.

“We get calls and emails from concerned state employees who are worried this may happen again,” said Chiang spokeswoman Hallye Jordan. “But legally, there is a stay in place and the issue is before the appellate court. At this point, we will not be making any changes.”

If the track record in dozens of other court cases is followed in the minimum-wage case, whatever the ruling of the court, an appeal will be filed immediately to the state Supreme Court. That court has declined the governor’s request to fast-track other cases, which makes it unlikely that a final decision will be made by the beginning of the new fiscal year on July 1.

“The controller will comply with any court order,” noted Jacob Roper, a spokesman for the controller’s office.

The administration is waiting to see how the courts rule. But the administration leaves little doubt that it believes the controller does not have the authority to disregard the orders of the administration when it exercises its budget-implementation authority delegated to it by the Legislature.

“Our position is that the controller violated the law by refusing to implement the DPA’s instructions to withhold full wages in the absence of a budget,” said Lynelle Jolley, a spokeswoman for the state Department of Personnel Administration. “All the court briefs have been filed and we are waiting for a hearing date.”

But the unresolved case is ticking like a time bomb in Sacramento, and state employees who faced the cut last time are worried that it may return this year, when the state’s budget shortage at $20 billion is at least $4 billion worse than it was in 2008 when the cut originally was proposed.

The cuts also are far more complex than they first appear. The checks to state employees reflect deductions for direct bank deposits, mortgages, auto loans, spousal support, court-authorized garnishments, and the like, and additions such as overtime and expense reimbursements. The check-write process is complex and made even more difficult by an aging computer system, as the controller himself has noted.

Overtime, particularly, could be touchy. Partly, that’s because of the way it is computed during the month and partly because of federal law, which requires anyone working overtime to be paid at their full salary level.  

“Pragmatically, we just can’t get the system to work in a timely manner for us to implement payment of minimum wage,” Chiang said in 2008. The system is a 1970s legacy computer patchwork using COBOL, although authorities hope it will be significantly modernized within the next two years.

The controller’s office uses what is called a ”negative payroll system,” in which overtime, for example, is calculated 10 days before the end of the month, so the checks can be written and then received by the first of the following month.

Delays in overtime payments could result in penalties levied against the state under Fair Labor Standards Act. “That could mean double damages,” Roper said.

 By one estimate, about 173,000 of the state’s 238,000 employees could be included. Full-time state employees earn an average of about $66,000 annually – or about $5,500 a month. If the $7.75 per hour level was put in place, the monthly gross income would drop to about $1,333.

“It’s an 80 percent pay cut. It shortchanges them and it affects the economy,” said Bruce Blanning, executive
director of the 3,000-member Professional Engineers in California Government.

“If somebody works for you in the payroll period, you pay them. When you work for someone, you get paid. But these folks (the state) are saying, ‘We’re not going to pay you, at least we’re not going to pay you on time.’”

Eds: Corrects original by deleting reference to doctors, lawyers; adds detail of constitutional authority.

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