United States: California Enacts The Nations Highest Statewide Minimum Wage Increase

On March 26, 2016, California legislators proposed legislation designed to raise the statewide minimum wage gradually until it reached $15 in 2022. Lawmakers achieved an agreement with the labor unions regarding this legislation. On March 31, 2016, California's Assembly and Senate both voted to approve the bill and sent it to the desk of Governor Jerry Brown for his consideration. On April 4, 2016, Governor Brown signed Senate Bill 3 into law.

The Terms of the Minimum Wage Increases

Under this new law, the minimum wage will increase for employers with 26 or more employees as follows:

January 1, 2017 - $10.50 per hour
January 1, 2018 - $11.00 per hour
January 1, 2019 - $12.00 per hour
January 1, 2020 - $13.00 per hour
January 1, 2021 - $14.00 per hour
January 1, 2022 - $15.00 per hour

For employers with less than 26 employees, the minimum wage increases will be delayed by one year on the following schedule:

January 1, 2018 - $10.50 per hour
January 1, 2019 - $11.00 per hour
January 1, 2020 - $12.00 per hour
January 1, 2021 - $13.00 per hour
January 1, 2022 - $14.00 per hour
January 1, 2023 - $15.00 per hour

Future Increases

Following the final increase to $15 per hour, in subsequent years adjustments to the minimum wage will be made by the California Director of Finance. These changes will be based on the average rate of change of the federal Consumer Price Index ("CPI") and will take effect on January 1 of the following year. If the average rate of change of the CPI is negative, there will be no increase or decrease in the minimum wage. However, if the CPI increases by more than seven percent, then the minimum wage for the following year will be set based on CPI averages and will be the same for all employees, regardless of the number of employees a particular employer has.

The Governor's Discretion to Suspend Minimum Wage Increases

Senate Bill 3 provides the California governor with discretion to temporarily suspend the scheduled minimum wage increases in certain circumstances. Specifically, beginning July 2017 and continuing thereafter until January 2022, the Director of Finance must provide annual reports regarding total employment numbers in California, the state general fund, and sales and tax cash receipts. Based on the numbers in these reports, the Governor may temporarily suspend the scheduled minimum wage increases. However, his or her power to do so may only be exercised twice in this five year period. If a minimum wage increase is suspended by this method, subsequent increase dates will be postponed for an additional year.

Who Is Affected

The scope of the minimum wage's application is set by the amended statute's definition of "employer." This definition is more expansive than some of the existing definitions of the term in the current California Labor Code, and includes entities that could be considered joint employers. Importantly, there are no exemptions or carve-outs in the definition of an employer in this amended statute and public sector employers are included.

Other Provisions in the Law

In addition to providing for minimum wage increases, Senate Bill 3 will phase in paid sick leave for in-home supportive care workers ("IHSS"), who were previously excluded from the statewide paid sick leave law that took effect in 2015. This provision will go into effect beginning on July 1, 2018. The amendments to the paid leave law also set out, for IHSS workers only, a revised definition of the term "full amount of leave." This term now means 8 hours or 1 day of paid sick leave in each calendar year of employment, or 12-month period beginning July 1, 2018; 16 hours or 2 days once the minimum wage reaches $13 per hour; and 24 hours or 3 days once the minimum wage reaches $15 per hour.

Effects of the Increases

More Stringent Local Increases

Unlike laws passed by some other states, Senate Bill 3 does not bar counties and cities from enacting their own minimum wages that are higher than the state's minimum wage. For employers with operations in any of the several California cities that have already adopted their own minimum wage laws, Senate Bill 3 likely will not impose any new restrictions. For example, employers with operations in San Francisco must continue to comply with San Francisco's more stringent minimum wage laws, which set the current minimum wage at $13 per hour, increasing to $14 per hour in 2017 and $15 per hour in 2018.

The same is true for employers in the city of Los Angeles and the county's unincorporated areas, who will pay $10.50 per hour in minimum wage beginning July 1, 2016, with the rate increasing until it reaches $15 per hour in 2020 for employers with 26 or more employees and in 2021 for employers with 25 or fewer employees. Unlike California's recent minimum wage law, which goes into effect January 1, 2017, the minimum wage increases in Los Angeles city and county will begin an incremental clime on July 1, 2016.

Similar ordinances have been passed in other California cities, including Pasadena, Santa Monica, which voted to adopt an identical ordinance, and Long Beach, which has implemented an incremental minimum wage increasing to $13 per hour by 2019. While West Hollywood's mayor has also voiced her intent to move toward a similar wage increase schedule, it is unclear if West Hollywood and other cities will continue down this path now that California has implemented a statewide increase, albeit commencing on a later date than Los Angeles, and its neighboring jurisdictions.

However, employers operating in cities that do not yet have local minimum wage laws must immediately take steps to comply with this new state law. Failure to comply could include statutory penalties, private or administrative claims for unpaid wages brought by either the California labor commissioner or employees, and liability for employees' attorneys' fees and costs.

Salary Requirements for Exempt Employees

The new law will also greatly affect the minimum salary requirements for California's exempt employees. Exempt employees are required to earn at least two times the state's minimum wage. Under the prior law, this requirement made $41,600 the minimum annual salary required for an exempt employee. Once California's minimum wage reaches $15 per hour in 2022, this minimum annual salary will increase accordingly to $62,400. The annual salary for exempt employees will increase as follows:

January 1, 2017 - $43,680 annually
January 1, 2018 - $45,760 annually
January 1, 2019 - $49,920 annually
January 1, 2020 - $54,080 annually
January 1, 2021 - $58,240 annually
January 1, 2022 - $62,400 annually

Steps Employers Should Take Now

  • Assess whether your business is subject to an earlier or more stringent local minimum wage ordinance based.
  • Assess whether your business entity is considered an "employer" under the definition provided in Senate Bill 3.
  • Assess the new minimum wage's effect on payment of overtime wages and exempt employees' compensation.
  • Update minimum wage posters before the new rate takes effect on January 1, 2017 or January 1, 2018, depending on the number of employees (or a minimum wage notice pursuant to an earlier or more stringent local minimum wage ordinance).
  • Inform employees about their new pay rate and when they will take effect.
  • Train human resources, payroll, and managerial employees on the increases, posting, and notice requirements.

We will keep you apprised of any future developments in state laws and local ordinances effecting the minimum wage, and are available to assist with implementation of the new minimum wage requirements.

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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