• Minimum Wage Increase Impacts Overtime Exemptions, Work Rules and Agreements
  • October 11, 2013
  • Law Firm: Ballard Rosenberg Golper Savitt LLP - Glendale Office
  • Under new legislation signed by Governor Brown last week, the California minimum wage will increase to $10 per hour by the beginning of 2016, a 25% increase in just over two years. The legislation makes California the first state to raise its minimum wage to $10.

    The increase will come in two steps. First, effective July 1, 2014, the State minimum wage will increase from $8.00 per hour to $9.00 per hour. Then, on January 1, 2016, it will increase another dollar to $10.00.

    The impact of the increases will go well beyond their direct effect on hourly-paid employees. For example, the new rules will effectively set new minimum salaries for non-exempt employees who are paid on salary basis. Employers who choose to pay non-exempt employees a salary must understand that the salary may only cover the first 8 hours worked in the day and that overtime premium pay (at either 1.5 or 2x the employees regular rate) must be paid after that. This is the law and no contract which the employer and employee may enter into can vary this obligation.

    Many employers erroneously believe that salaried employees are exempt from federal and state overtime pay requirements. That's simply not true. To be eligible for an overtime pay exemption, the employees' duties must qualify for an exemption and the employee must be paid a minimum salary (which is at least twice the state's minimum wage). For those employees whose duties don't qualify for an overtime exemption, the employee must be paid the applicable minimum wage for every hour worked.

    Another significant impact of the minimum wage increase is that it will effectively raise the minimum salary required for employees to be properly classified as overtime exempt under the so-called "white collar" exemptions (i.e., the executive, administrative and professional exemptions). To qualify for any of those exemptions, an employee must have a salary equivalent to at least twice the minimum wage. Currently, an employee with an annual salary of $33,280 will meet this salary threshold. However, because it is tied to the minimum wage, that threshold will increase to $37,440 next July, and then increase again to $41,600 in 2016. This could result in currently-exempt employees being rendered non-exempt, thus exposing their employer to potential liability and penalties for failure to pay them overtime premiums. For example, a department manager at a retail store who earns an annual salary of $40,000 (and otherwise meets all of the criteria for the executive exemption) will no longer qualify for exemption when the salary threshold rises to $41,600 on January 1, 2016 unless his salary is increased to the new (higher) threshold.

    Another overtime exemption that will be affected by the minimum wage increase is the so-called commissioned salesperson exemption, which applies if more than half of an employee's compensation is in the form of commissions and the employee's total compensation exceeds one and one half times the minimum wage. The minimum wage increases will raise this minimum compensation threshold and may cause some commissioned sales employees to become non-exempt and eligible for overtime pay.

    Other compliance issues tied to the minimum wage increase include the Wage Orders' "tools of the trade" provision (an employee may be required to provide his or her own tools if the employee earns at least two times the minimum wage); collective bargaining agreements that provide for overtime premiums that are different from the premiums otherwise required by law (permissible if employee pay rates are not less than 30% more than the minimum wage) and agreements setting special hourly rates for travel or on-call time (often based on the minimum wage).

    Employers should proactively identify the policies, work rules, agreements and economic decisions that may be affected by the increases well in advance of their effective dates.