If you ever wondered if/how the federal wage and hour laws apply to employees in California, the general rule is that the scheme most beneficial to the employee (state or federal) is the one that will be applied. In most cases here, that will be California state wage and hour laws, but California courts, and even the state Department of Labor Standards Enforcement (the “Labor Commissioner”) borrow liberally from federal wage and hour law in interpreting many state laws and regulations, and wherever California law is silent so federal authorities also have an impact on state employers.
As most employers are aware, it can be challenging to classify employees as exempt or non-exempt under wage and hour laws, and the consequences of misclassification can be high. California’s rules require that in order to be exempt from overtime, meal and rest breaks and other requirements prescribed by the IWC-mandated Wage Orders, employees must meet a two prong test. First, actual performance of their job duties must meet the requirements of one or more exempt categories AND second, they must be paid a salary that is at least twice minimum wage based on a 40 hour workweek (as of January , 2016, that’s $20/hour x 40 hours x 52 weeks = $41,600 minimum annual salary). Those thresholds, California believes, keep employers from avoiding compensation obligations to what are otherwise properly classified as hourly employees.
So just when you thought you had your arms around the California, rules, enter the federal government. Federal wage and hour laws have a similar scheme to California: job duties + minimum salary. Though there are some differences in the “duties test” between state and federal law, the biggest discrepancy, to the benefit of California employees, has been the minimum salary provision. Under federal law, the minimum salary for an exempt employee is $400/week ($20,800 annually), unchanged since 2004. For the past several years, the Obama administration has been studying ways to see that the so-called “white collar exemption” is not unfairly restricting employees’ ability to earn a fair wage for their efforts. Some employers designated the majority of their workforce “exempt” then required long hours of work without ability to earn overtime pay, sometimes bringing their labors below minimum wage when applied to the hours worked.
Last year, the Department of Labor announced a proposed new rule that would raise the federal “exempt” salary to $50,400/year, together with a formula for annual increases. Because that amount exceeds the California minimum salary, California employers would have to comply with the higher standard. The proposed rules were published last year, comments received and we have been waiting for information concerning when the final rules would go into effect. Recently, the administration has been under pressure to publish the final rules (which would then become law 60 days after publication). It is therefore expected that the rules may be published anytime, likely no later than July, and go into effect by September.
Though legislative action has been threatened, and could still happen, prudence dictates that you get ready now so that you do not find yourself in an expensive position on the day the regulations go into effect. You will need to evaluate any employees who are currently classified as exempt and determine if it is more advantageous to your business to pay the employees hourly with the potential for overtime and the attendant necessity to keep records of work time and meal breaks, or to be prepared to pay the new minimum salary. This is also a good time to look at whether employees you hope to continue in exempt status continue to meet the duties test. You may also wish to consider whether +you can lawfully utilize independent contractors for some of the work being done by employees.
These issues can be very complex and have to be evaluated on a case-by-case basis. Please don’t hesitate to contact me if I can assist you with this process or with other employment law challenges.
