Both California and federal law establish minimum wage and overtime rules. Both laws also contain exemptions from those rules for “white collar employees” who meet the standards of the executive, administrative, and professional exemptions. The state and federal exemptions differ in numerous material respects, including the minimum salary level that employees must be paid in order to qualify as exempt. Currently, California law requires that exempt employees receive a salary of no less than $960 a week. In contrast, the minimum salary under the federal Fair Labor Standards Act (“FLSA”) has been set at $455 a week since 2004. (The rules are explained in Chapter 10 of the Wage and Hour Manual for California Employers, by Attorney Richard J. Simmons of Sheppard Mullin.)

1. Changes In The Federal Salary Level

Several years ago, the U.S. Department of Labor (“DOL”) proposed a substantial increase in the minimum salary required under the FLSA from $455 to $916 per week. The proposed hike, which was scheduled to take effect in December of 2016, was derailed after the regulations were challenged and blocked in federal court. Following changes in administrations resulting from the election of President Trump, a new proposal was issued earlier in 2019 that included an increase in the minimum salary level to an amount lower than the increase proposed by the Obama Administration. On September 24, 2019, the DOL announced a final rule that will update the earnings threshold necessary to qualify as an exempt executive, administrative, or professional employee. The new rule also allows employers to count a portion of certain bonuses/commissions toward meeting the salary level. The DOL announced that the increase in the minimum salary level will result in 1.3 million workers losing their exempt status and becoming eligible for overtime pay. Under the final rule that will become effective on January 1, 2020, the “standard salary level” will increase from $455 to $684 per week. This is equivalent to $35,568 per year for a full-year worker. In addition, unlike California law, the FLSA contains a special exemption for “highly compensated employees” (“HCE”). The total annual compensation level that must be paid to qualify under the HCE standard will increase from $100,000 to $107,432 per year. The final rule also will allow employers to use nondiscretionary bonuses and incentive payments (including commissions) that are paid at least annually to satisfy up to 10% of the standard salary level, in recognition of evolving pay practices.

2. The California Standard Will Remain Higher

California employers should take note of the fact that the minimum salary required for the state exemptions will remain higher than the new federal standard. Under Labor Code Section 515, the minimum salary is set at a level equivalent to two times the minimum wage for a full-time employee working 40 hours a week, or 80 times the minimum wage. Because the minimum wage in 2019 is $12 an hour, the minimum salary in 2019 is $960 per week. This amount will increase to $1,040 per week (i.e., 80 x $13 an hour) on January 1, 2020, when the state minimum wage increases from $12 to $13 an hour. California law does not have an HCE standard and does not permit employers to credit commissions or bonuses towards the minimum salary requirement.

3. Remember That Other Rules Also Apply

It should also be remembered that state and federal laws impose requirements beyond the minimum salary level. The additional requirements include a “salary basis test” and a duties test. Under federal law, an exempt employee’s “primary duty” must consist of exempt activities. California law requires that employees be “primarily engaged in” exempt activities to qualify as exempt. Even though the language in the state and federal rules is similar, they are defined to include significantly different standards. For a detailed review of the state and federal exemption standards, see Chapter 10 of the Wage and Hour Manual for California Employers, by Attorney Richard J. Simmons of Sheppard Mullin. The book is available from Castle Publications, Ltd. either in print or electronic form.

4. The Wage And Hour Seminar

The new rules will be discussed at Castle’s October 2, 2019 program on Wage and Hour Laws at LAX. Details regarding the program are discussed later in the ALERT.

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