Overtime Pay Ruling Could Cost $2 Billion : Supreme Court: U.S. justices let stand a ruling on salaried employees treated like hourly workers.

California cities and counties may owe their employees as much as $2 billion for unpaid overtime work, under a ruling the Supreme Court let stand Tuesday.

Los Angeles County officials said the ruling affects 23,000 of its 78,000 full-time employees and could cost the county $170 million.

The decision covers all public employees who may have been considered exempt from overtime pay but whose wages can be docked if they miss a few hours of work. They include accountants, engineers, probation officers, child-welfare workers and fire captains.

Public agencies typically have classified these as “salaried” employees because they are paid an annual salary. As a result, they have not received time-and-a-half pay for working overtime, usually defined as more than 40 hours a week.

But the U.S. 9th Circuit Court of Appeals in July ruled that such employees actually are hourly workers, not salaried employees, because their pay could be docked for absences.

Although the Supreme Court ruling is expected to take a huge toll on some governments, Orange County officials said they do not expect it to affect them.

“One of the tests in this case is whether you can deduct pay for a partial day of work” by a salaried employee, said Terry Andrus, a deputy county counsel. “We don’t believe we have anybody who falls in that category. We’re pretty sure we’re in compliance.”

Orange County officials circulated a memorandum last summer, clarifying their overtime policy to make sure that it complied with the appellate court ruling that was allowed to stand, Andrus added.

Other counties expect to be hard hit, however.

“This turns the civil service system upside down. I’m the chief trial attorney for the county, but I’m an hourly peon under this ruling,” said Kern County Atty. Robert D. Woods, who appealed the decision to the high court.

Since 1986, the federal Fair Labor Standards Act has required public agencies to pay overtime to hourly workers. The law also says that employees can file claims retroactively for unpaid overtime for up to two years.

Fearing a ruinous impact on public budgets, attorneys for Los Angeles County, the state of California and the League of California Cities urged the Supreme Court to reverse the federal appeals court ruling.

But without dissent Tuesday, the Supreme Court refused to hear the appeal, leaving the ruling intact.

Officials in state, county and city governments are just beginning to calculate the potential costs of the decision.

The expected $170 million liability faced by Los Angeles County represents what officials calculate as the cost of paying the additional overtime earned during the last two years.

“We actually think that’s a conservative estimate,” said Albert D. Kelly, a deputy county counsel.

Los Angeles city officials said the decision could require payments of tens of thousands of dollars to 2,500 managers and 180 high-ranking police and fire officials.

The League of California Cities and the County Supervisors Assn. of California estimated that as many as 125,000 city and county employees in the state may be affected by the decision. Its attorneys told the high court that the retroactive cost for two years is “estimated to exceed $2 billion for California cities and counties.”

Congress passed the Fair Labor Standards Act in 1974, but two years ago the Supreme Court ruled that it could not be applied to state and local governments. On a 5-4 vote, the high court said the Constitution does not permit the federal government to dictate the employment standards of state and local governments.

But in 1985, the high court reversed itself on another 5-4 vote. Congress then amended the law and said it would cover state and local agencies as of April 14, 1986.

Since then, some union lawyers have contended that public employers have unfairly labeled mid-level employees as “salaried” executives simply to avoid paying them the required time-and-half rate for overtime.

Reno, the San Francisco attorney, filed a suit on behalf of 28 fire battalion chiefs in Kern County. Although they regularly worked 56 hours per week, the fire captains were classified as salaried workers. Their salaries ranged from $40,536 to $49,476 per year, plus fringe benefits, the county said. They were also paid extra for overtime, but not time-and-a-half.

No battalion chief had ever had his pay docked for missing a few hours of work, but civil service rules in Kern County and elsewhere in California require that the absence be recorded. Thus, theoretically, if not in practice, such employees could have their pay docked.

Because the Supreme Court refused to review the ruling in the case (Kern County vs. Abshire, 90-839), the 9th Circuit decision becomes law in the Western states.

For the future, government agencies could avoid paying these overtime costs by revising their pay policies so that employees cannot be docked for missing a few hours work.

In another case, the Supreme Court refused to consider whether California counties are unconstitutionally limiting off-shore oil drilling.

Times staff writer Shawn Hubler in Los Angeles contributed to this story.