We recently blogged about the U.S. Department of Labor’s dramatic increase in the salary threshold for exempt employees. The federal changes put California in the unusual position of having (at least as to one corner of the wage and hour universe) less favorable standards than federal law. But have no fear—California has recently raised its own minimum wage, which surpasses the federal standards. Together, the federal and California state law changes will have costly affects for California employers who employ exempt employees earning less than $47,476 by December 1, 2016. California employers should start planning now to make adjustments for compliance with both state and federal exemption laws.
What is California’s Minimum Wage? The current minimum wage for employers with at least 26 employees in California is $10.00 per hour – but not for long! Beginning January 1, 2017, the minimum wage will increase annually until it reaches $15 per hour by January 1, 2022:
- January 1, 2017 through December 31, 2017: $10.50 per hour.
- January 1, 2018 through December 31, 2018: $11 per hour.
- January 1, 2019 through December 31, 2019: $12 per hour.
- January 1, 2020 through December 31, 2020: $13 per hour.
- January 1, 2021 through December 31, 2021: $14 per hour.
- Beginning January 1, 2022: $15 per hour.
How Does the FLSA Regulation Affect California Employers with Exempt Employees? Under California’s salary basis test, exempt employees must (among other requirements) earn at least twice the state’s minimum wage, meaning that under the current $10 per hour minimum wage, exempt employees must earn an annual salary of $41,600 ($10 per hour x 2 x 40 hours per week x 52 weeks per year). But due to recent amendments to the FLSA, it is not enough to simply follow the scheduled annual increases to the state minimum wage.
The new FLSA regulation, which takes effect December 1, 2016, more than doubles the current federal salary threshold for exempt employees from $455 a week to $913 a week or $47,476 per year. Historically, federal exemption regulations did not have a major impact on California employers since their requirements were much lower than the state level – until now. This federal threshold exceeds California’s minimum exemption salary until the state minimum wage reaches $12.00 per hour on January 1, 2019. However, the DOL will update the minimum salary threshold for exempt employees every three years, starting January 1, 2020, compelling employers to re-assess compliance under the FLSA standard once again.
This regulation will force many California employers to choose between raising the salary of exempt employees to the federal threshold of $47,476 (until it increases again in 2020) or reclassifying employees entirely to hourly (and therefore eligible for overtime pay). For those who choose the latter option, keep in mind that the state minimum wage will reach $15.00 per hour by 2022.
What Can Employers Do Now? Employers are encouraged to start assessing their workforce and compensation policies to prepare for dramatic annual increases to compensation for exempt employees who are at or close to the current state minimum allowable salary. Though entry level managerial positions are likely to be the most affected by the federal increase in the exempt salary threshold, employers should consider conducting an audit, through counsel, of their workforce to determine what portion of their workforce will be affected by the new regulation and whether re-classifying some workers as non-exempt is the less-costly option.