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2014 California Minimum Wage Increases – Give Your Exempt Employees A Raise!

Now that the California minimum wage will increase to $9/hour on July 1, 2014 and to $10/hour on January 1, 2016, California employers must gear up for pay raises to their exempt employees.  That’s a 12.5% legally mandated pay raise in 2014 and another 11.1% in 2016.

How so you ask?   

Minimum Wage Drives Exempt Status

Since 2000, California labor law ties overtime “exempt” employee status to the minimum wage.  Thus, California employers, including small and medium businesses, must pay exempt employees a “salary” that is at least twice the minimum wage.  That means every time the California minimum wage increases, California businesses must give their salaried overtime exempt employees a pay raise to maintain their exempt status. 

As of July 1, 2014, California employers must pay exempt employees a minimum of $37,440 per year ($9/hour x 2 x 40 hours per week x 52 weeks per year).  That’s a $4,160/year (12.5%) increase over the current salary minimum of $33,280/year.

Then in 2016 the minimum salary must increase to $41,600/year (an 11.1% increase over 2014/2015) to maintain exempt status.

Why Do We Care?

California employers need not pay exempt employees overtime.  Other pros include exemptions from rest and meal period laws and from having to maintain detailed time records for working time (the burden of which is on the employer for non-exempt employees).  Moreover, while working “off the clock” is often the basis for non-exempt employee wage and hour lawsuits, no such claim applies to exempt employees.

Don’t Forget About The Duties Test

Payment on a “salary basis” is one of the exempt tests.  But to be “exempt” the “duties test” must also be met.  The duties test has to do with the type of work the employee does.  Under California labor law an exempt employee must perform “exempt duties” at least 50% of the time. 

What are “exempt duties” depends on which exemption we’re relying on.  They are too complex and detailed to do justice here.  For now just understand that simply because you pay your employee a “salary” does not automatically make them “exempt.”  This is a common misconception among small and medium employers.  In fact, a non-exempt employee may be paid on a “salary basis.”  But if a non-exempt employee paid a salary works overtime, you must pay them overtime.  And the California overtime calculation for non-exempt salary employees will shock you (see below).

The Legal Liability Potential Is Significant

Imagine having to pay overtime for an otherwise exempt employee because their salary falls below the $37,440 (2014) or the $41,600 (2016) minimum.  10-20 hours, or more, of unanticipated overtime per week can be a large sum.  Moreover, the statute of limitations on overtime claims is at least three, possibly four years.  That’s a long time.

Further, the overtime calculation is also not what you might expect.  The calculation is the annual salary ÷ 52 weeks per year ÷ 40 hours per workweek = the “regular rate.”  Regular rate x 1.5 (overtime) x the overtime hours = the overtime pay.  You can run your own math based on a $33,280/year salary (the current minimum salary until December 31, 2013), 10 hours of overtime per week for three years.  You’ll see the number is large relative to the salary paid those three years. 

The Easy Fix!

Make sure all of your exempt employees are being paid on a salary basis at a rate that is at least $37,440/year (2014) or $41,600/year (2016).