Impacts All California Employers

Salary Minimums To Increase Every Three Years

Effective December 1, 2016

Today the U.S. Department of Labor released final regulations which greatly increase the number of workers eligible to receive overtime pay.  This is due to the new minimum salary necessary to be considered exempt from minimum wage and overtime under the Fair Labor Standards Act (FLSA) which has doubled from $455 per week ($23,660 per year) to $913 per week ($47,476 per year).  The new salary minimums are effective December 1, 2016.

Under the so-called white collar exemptions for executive, administrative, professional and computer professionals, employees need to meet both a duties test and make a certain minimum amount in order to be ineligible for overtime pay.  The new amount is equal to the 40th percentile of weekly earnings for full-time, salaried workers in the lowest-wage Census Region, currently the South.  In addition the DOL increased the salary basis for so-called Highly Compensated Employees (HCE) from $100,000 per year to $134,004, an amount equal to the 90th percentile of earnings for full-time salaried workers nationwide. The salary basis was last updated in 2004.  

For the first time, employers will be able to count bonuses and commissions toward as much as 10 percent of the salary threshold provided these payments are made on a quarterly or more frequent basis.  Moreover, employers will be allowed to make quarterly “catch-up” payments.

The final regulations call for the salary basis to automatically increase every three years in order to maintain the standard salary level at the 40th percentile of earnings for full-time salaried workers in the lowest-wage census region and the HCE total annual compensation at the 90th percentile. The first update will take effect January 1, 2020, and based on current projections of wage growth, is expected to rise to more than $51,000 at that time.  The Department will publish a notice of the updated minimum salaries in the Federal Register and on its website at least 150 days before the updated amounts take effect.  This gives employers about five months’ notice of the increased salary minimums  in order to evaluate and implement changes.

Duties Test

The Department has not modified the standard duties tests, as many employers had feared.   In order to qualify as exempt from overtime and minimum wage under the FLSA, an employee must “primarily” perform executive, administrative or professional duties, as defined by the DOL.  There is no explicit cap on non-exempt work.  However, under California law exempt employees must spend 51 percent or more of their time on exempt level tasks in order to be properly classified as exempt (essentially capping non-exempt work at 49 percent).  

Specific Implications for California Employers

Because the salary basis for exempt employees under California law is currently just $41,600 (and will increase on January 1, 2017 to $43,680 for employers with 26 or more employees), California employers, who are typically not impacted much by changes to federal wage and hour law, will be directly affected as the higher federal salary minimum for exempt employees will apply in all 50 states.  

Because the federal level is higher and will outpace California’s own minimum salary increases (as the state moves to a $15/hour minimum wage) until January 1, 2019 (when the state’s salary basis will be $49,920 for employers with 26 or more employees), California employers who presently have exempt employees earning less than $47,476 per year will need to decide in the next six months whether to convert such employees to non-exempt or increase their pay to the new minimum in order to continue to classify them as exempt.  The only exception is for computer professionals who must be paid $87,185.14 annually ($41.85 hourly) to be exempt under state law.  California employers are also reminded that the state does not have an Highly Compensated Employee exception as exists under federal law.

Wilson Turner Kosmo partner Lois M. Kosch, along with Michael Eastman of Washington, D.C. based NTLakis, will be discussing these regulations and their impact on California employers in a SHRM webcast, California and the Federal FLSA Overtime Rule, next Thursday, May 26 at 1:00 PST.

For additional information and to register: 

https://event.on24.com/eventRegistration/EventLobbyServlet?target=reg20.jsp&referrer=&eventid=1193475&sessionid=1&key=68C5F315D78FA5DE32287F58E4BA
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For additional information or assistance with potential reclassification of employees, please contact these Wilson Turner Kosmo attorneys:
 
Lois M. Kosch —  lkosch@wilsonturnerkosmo.com
Marissa Lyftogt — mlyftogt@wilsonturnerkosmo.com
Emily Fox — efox@wilsonturnerkosmo.com