California’s minimum wage rises to $10 per hour starting January 1, 2016. Once again, California employers must gear up for pay raises, not just for employees paid on an hourly basis at minimum wage, but also for exempt employees. We explained why this is the case two years ago when California’s minimum wage last rose. The lesson is important, so we’ll adjust the numbers and provide an updated perspective into California and federal minimum wage laws.
California’s 2016 Minimum Wage
It’s easy to understand why an increase in the minimum wage can affect businesses paying employees by the hour. Less obvious is the effect of a higher California minimum wage for employers with exempt employees.
Minimum Wage Impact on Exempt Salary Under California Law
California law provides exemptions from California’s overtime pay requirement if certain legal tests are met. One legal test (but not the only) for exempt status is the employee must be paid a salary (versus, hourly, commission or some other basis). The salary must be no less than the equivalent of two times the state minimum wage for full-time employment.
Full time employment is based on 2,080 work hours per year (40 hours a week multiplied by 52 weeks a year). Using the 2016 minimum wage of $10/hr, the minimum salary is $41,600/year ($10/hr x 2 x 2080), up from $37,440/year (based on the prior minimum wage of $9/hr).
Thus, the minimum salary for exempt status is tied by California law to the California minimum wage. As the California minimum wage increases, you must give your exempt employees a raise unless the salary already exceeded the required minimum salary. If your exempt employee’s salary falls below the required minimum, you no longer have an exempt employee. The consequences can be devastating.
Consequences Of Treating An Employee as Exempt When They Aren’t
Exempt status is commonly misunderstood. There are many ways to get it wrong. One sure fire way to “misclassify” an employee as exempt is to pay them less than the required minimum salary. If that happens, the employee is automatically non-exempt. That can result in serious and compounding problems:
- Lack of Time Records – Employers usually do not track exempt employees’ work hours. As a result, if your employee is misclassified as exempt most likely you have no time records. This non-exempt employee can now sue you for failure to pay minimum wages and overtime, working off the clock, missed meal periods, and inaccurate itemized wage statements. Without detailed time records, you will be in trouble if sued.
- Failure to Pay Overtime – The worst case scenario: say you have an employee you treat as exempt as of 1/1/2016 who you pay $41,000/year (note this is less than the required minimum by $600) and who works 50 hours a week for you through 12/31/2016 (one year). The California Labor Commissioner or a court decides after the fact the employee was non-exempt. You have an overtime violation. The overtime calculation may surprise you. First, you must calculate the “regular rate.” Then you multiply the regular rate times 1.5 (overtime rate) times each overtime hour to determine overtime compensation owed. Using the example above, the regular rate is $19.71/hr ($41,000/2080). The overtime owed is $15,375 (10 overtime hours per week x 52 weeks x $19.71 x 1.5). Incorrect classification may result in you having to make large, lump sum payments to misclassified employees for unpaid overtime.
- Min Wage Plus Liquidated Damages – Because you compensated the employee you thought was exempt $0 for the overtime hours there is also a minimum wage violation. The overtime calculation above takes care of the minimum wage but Labor Code section 1194.2 imposes “liquidated damages” in the same amount as the unpaid minimum wages. Here that amount would be $5,200 (10 unpaid hours per week x 52 weeks x $10/hr minimum wage).
- “Waiting Time” Penalties – If an employee is discharged or quit and you owed them any wages, including minimum wages or overtime wages, then you can be liable for “waiting time” penalties from the date their final pay was due. The maximum penalty is 30 days’ wages at the employee’s regular rate of pay. In the above example that’s $4,730.77 ($19.71 x 8 hours per day x 30 days).
- Inaccurate and Incomplete Wage Statements – Under Labor Code 226, your business can be liable for up to $4,000 more in penalties because it didn’t list the regular and overtime hours, rate, and gross wages for each, on your employee’s itemized statements (paystubs).
- Attorneys’ Fees & Costs – Your employee or former employee would also be entitled to recover their “reasonable” attorneys’ fees and costs on the above claims. Attorneys’ fees will be awarded and we are confident you will not consider them to be “reasonable.”
The unpaid wages and penalties above equals $29,305.77 and that does not include the other side’s attorneys’ fees and costs. Exempt status is nothing to fool around with. Be sure to double check your exempt employees’ minimum salary and that all legal requirements for exempt status are met.
Higher City or County Minimum Wage
Several California cities and counties have a higher minimum wage than the state’s minimum. If you operate in one of those cities or counties, that means you have to pay the higher local minimum wage to hourly non-exempt employees. Note, however, the minimum salary for exempt status is based on the California state minimum wage, not on the local minimum wage.
Federal Law Salary Minimum Likely To Increase
To add to the complexity, the federal government is likely to increase the federal minimum salary for exempt status in the near future. California businesses must always be wary that both California state law and federal law may apply to their business. This is true for exempt status.
Both the State of California and the United States of America have laws on exempt status. Both laws are similar and impose a minimum salary requirement. To this point, California’s minimum salary has historically far exceeded the federal salary minimum.
In an unusual development, the federal Department of Labor has issued a proposed rule that would make the federal minimum salary much higher than the California minimum of $41,600. The proposed increased federal minimum salary for exempt employees is $921 a week, or $47,892 per year. If the proposed rule becomes final, the increase is anticipated to take effect in 2016.
California employers would need to pay the federal $47,892 minimum in order for employees to be exempt from federal overtime laws. California employers will have to meet the stricter of both California and federal law and, in this case, that would be federal law if the rule becomes final.
Check back for updates of the Department of Labor’s proposed rule and other minimum wage developments.
- California minimum wage increases to $10/hour as of January 1, 2016.
- Pay exempt employees in California a salary of at least $41,600/year as of January 1, 2016.
- Review all employees treated as “exempt” to ensure they meet all tests for the exemption, not just the minimum salary test. Misclassification of exempt status can be an extremely costly mistake.
- Watch for developments under federal law as they are likely to change soon and could increase the minimum salary for exempt status to $47,892/year.