United States: Minimum Wage, Maximum Headache: California's Minimum Wage Hits $10 In 2016. Are You Prepared?

As you brace for the New Year, don't forget that California's minimum wage will reach $10 per hour on January 1, 2016.  This latest increase is the final stage of the two-step legislation that increased the minimum wage from $8 to $9 per hour on July 1, 2014, and now to $10 per hour effective January 1, 2016.

At $10 per hour, California's state minimum wage is considerably higher than the current federal minimum wage of $7.25, and is among the highest state minimum wages in the nation.

In addition to the obvious increased cost of paying minimum wage employees, California's minimum wage hike will have a domino effect on various California wage and hour issues.  California employers should be prepared to address the following compliance areas in the New Year:

  • Non-Exempt Employee Pay. Employers will face higher hourly rates for both regular and overtime wages of their minimum wage employees.  The minimum overtime rate will increase from $13.50 to $15 per hour.  In that same vein, the double-time rate will increase from $18 to $20 per hour.
  • Meal/Rest Break Premium Pay. In conjunction with increased hourly rates for minimum wage employees, employers will be required to pay the same increased amount for missed meal or rest break premiums for minimum wage employees.
  • Salaried Exempt Employees. To take advantage of the "white collar" exemptions, employers must pay administrative, executive, and professional employees a minimum monthly salary of at least twice the California minimum wage for full-time employment.  This time around, salary thresholds for the white collar exemptions will increase from $37,440 to $41,600 per year.  With a hike in minimum wage, employers should that ensure all exempt employee salaries meet the new minimum threshold, or face losing the exempt status.
  • Commissioned Salespersons. The commissioned salesperson exemption requires that employees earn more than 1.5 times the California minimum wage for all hours worked during each pay period, with over half that amount representing commissions.  As a result of the new minimum wage increase, the minimum earnings rate will jump from $13.51 to $15.01 per hour for exempt commissioned salespersons.
  • Creative Professionals.  The exemption for creative professionals requires, among other things, that a creative employee be paid a salary of at least twice the state minimum wage for full-time employment.  Employers taking advantage of this exemption may need to up the salaries of their creative professionals.
  • Unionized Employees. California employees who are covered by a valid collective bargaining agreement are exempt from both overtime and California's paid sick leave if, among other things, the collective bargaining agreement sets the hourly pay rate at 30% or more than the state minimum wage.  Following the new minimum wage hike, an increased hourly rate may also be in store for your unionized employees.
  • Employees Who Supply Own Tools and Equipment. Employees who are paid at least twice the state minimum wage can be required to provide and maintain their own tools and equipment that are customarily required by their trade or craft.  The minimum wage increase will drive up the earnings for these employees, as well.
  • Meal and Lodging Agreements. Where a voluntary agreement is in place, employers may generally credit the value of employer-provided meals and lodging toward the minimum wage.  To remain valid, these types of agreements will need to be updated to reflect the increased minimum wage.
  • Notice to Employees Employers will be required to notify non-exempt employees in writing by January 7, 2016 regarding any pay rate changes.

Of course, several California cities impose even higher minimum wage requirements, including Los Angeles, San Francisco, Oakland, Berkeley, Emeryville, Mountain View, Richmond, San Jose, Palo Alto, Santa Clara, and Sunnyvale.  Employers operating in these cities should be aware that many of the local minimum wages are set to increase regularly, including during this next year.

In addition to the minimum wage increase, we will also see a rise in the minimum compensation rates for California's computer software exemption.  Effective January 1, 2016, exempt computer software employees must earn an hourly rate of $41.85 or an annual salary of not less than $87,185.14 and paid not less than $7,265.43 per month.

Don't forget, as we previously reported here, the Department of Labor ("DOL") also recently issued proposed regulations that would increase the minimum salary threshold for the administrative, executive, and professional exemptions to approximately $50,440 in 2016, with incremental increases in the years to follow.  Stay tuned for the DOL's final regulations, which we expect to see in Summer 2016.

With the New Year approaching, California employers should take care to review their compensation policies for exempt and non-exempt employees and ensure their payroll systems address the various implications of the new California minimum wage.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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