United States: The DOL's New Overtime Rule: Considerations For California Employers

Last Updated: June 1 2016
Article by Michael S. Arnold

As we reported earlier, the DOL has now released its final overtime rule. Two of the biggest takeaways are that the new rule (1) greatly increases the minimum salary threshold of the so-called "white collar" exemptions (at least $913 per week, equaling $47,476 annually); and (2) made no changes to the exemptions' separate job duties' tests. The impact of the new rule is expected to be far-reaching – affecting more than 4.2 million workers, with a predicted $12 billion boost to wages over the next 10 years. Below we address the new rule's impact on California employers, who must still comply with the state's wage and hour laws when making compliance decisions.

California Employers Must Remember that They Are Subject to a Different Salary Threshold That Will Rise Over Time

California has its own wage and hour law that has its own salary basis test for its white-collar exemptions: 40 hours x twice the state's minimum wage. Currently, the minimum wage is $10 per hour; therefore the minimum salary threshold is $800 per week (40 hours x 2 x $10), or $41,600 per year – about $6,000 below the new Federal OT rule's $47,476 salary threshold. But the California minimum wage will rise over time until it reaches $15 per hour by 2022, and then it will continue to rise based on a statutory-required formula. The new Federal OT Rule's salary threshold may also rise every three years (the next time will be in 2020).

This means that employers will have to pay careful attention to how the thresholds change over time to ensure they are classifying their employees properly. For example, beginning January 1, 2019, when California's minimum wage reaches $12 per hour, the threshold for California employers will be $49,920 – higher than the federal threshold, which may necessitate another classification change unless the employer raises the employee's salary. (For a complete analysis of the California minimum wage increase, see Mintz Levin's analysis here.)

California's "Primary Duty" Test Still Applies

California employers must remember that – regardless of the salary threshold – the state requires employees to be "primarily engaged" in exempt duties to qualify as exempt. This is different than the Federal standard, even under the revised law, which did not revise its duties tests (although some had thought the DOL would revise it make it more similar to California's test). This means that more than 50% of an employee's time must be spent engaging in the activities that earn the exemption (e.g., depending on the exemption, performing such activities as supervising others, exercising independent discretion and judgment, managing a subsection of the company, or performing tasks that utilize the skills learned in their advance degree). Thus, even if a California employer pays someone enough under the Federal and state standard, it may still not qualify them as exempt under California law.

California Does Not Have an Exemption for Highly Compensated Employees

The new rule also raises the salary threshold for highly compensated workers (subject to a different duties test) from $100,000 to $134,004. This is equal to the earnings of the 90th percentile of full-time, salaried workers nationally. However, California employers must be aware that California does not have the same or a similar exemption, and therefore an employee meeting the new rule's requirements may not be exempt under California law.

California Does Not Permit Employers to Include Non-Discretionary and Commissions in Satisfying the Salary Basis Test

The new federal rule permits employers to satisfy up to 10% of the salary threshold with nondiscretionary bonuses, incentive payments, and commissions, so long are they are paid at least quarterly. However, the California rules do not allow for this.

California Employer Compliance Considerations

In sum then, California employers, like employers operating in other states with their own wage and hour laws, must not forget to account for state specific requirements when making compliance decisions related to the new Federal OT rule. As noted above, in the future, simply raising one's salary to meet the new Federal OT rule may not be enough to satisfy California's exemption requirements. Employers will have to not only make sure that California's salary threshold does not exceed the Federal threshold, but also that the employee can meet the exemption's more stringent primary duty test.

Further, in running a cost-benefit analysis when revisiting classification decisions in response to the Federal OT rule, California employers must also consider California's unique overtime requirements. Whereas federal law only requires overtime pay at time and one half if an employee works more than 40 hours in a workweek, California requires overtime pay at a time-and-a-half if an employee works more than eight hours in a day or on seven consecutive days in a workweek, and at double time if an employee works more than 12 hours in a day or more than eight hours on the seventh consecutive day in a workweek. Thus, it may be costlier for employers to convert employees to non-exempt than they otherwise thought.

These are just some of the considerations employers must consider making when running their classification analysis. We will provide a more comprehensive treatment of these considerations in a subsequent post.

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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Michael S. Arnold
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