The new U.S. Department of Labor rule increasing, as of December 1, 2016, minimum salary requirements for exempt executive, administrative and professional workers will expand the ranks of those eligible for overtime pay. As explained below, the new rule impacts California employers, who were just hit with an increase as a result of the January 1, 2016 increase in the minimum wage. Employers will need to tread carefully in modifying practices and policies to minimize the increased payroll costs.

  1. The New Regulations. On May 18, 2016, the U.S. Department of Labor published its final rule, effective December 1, 2016, updating regulations that govern the exemption of executive, administrative and professional (“EAP”) employees from minimum wage and overtime pay provisions of the Fair Labor Standards Act (“FLSA”). The regulations increase the minimum fixed salary level required for an EAP employee to be considered exempt to $913 (from $455) per week or $47,476 (from $23,660) annually for a worker employed a full year. The regulations did not modify the other criteria for determining whether an EAP worker is exempt under the FLSA – e., whether the employee is paid a predetermined and fixed salary (except as noted below) and whether the worker’s job duties primarily involve executive, administrative or professional duties.
  2. The DOL’s regulations also raised the total annual compensation required for highly compensated employees (“HCE”) who are subject to a less stringent “duties” test to $134,004 annually, provided the employee receives at least $913 per week in salary. Under the FLSA, the other tests for an HCE to be exempt from FLSA overtime and minimum wage laws are (1) whether the employee’s primary duty includes performing office or non-manual work; and (2) whether the employee customarily and regularly performs at least one of the exempt duties or responsibilities of an exempt EAP employee. This exemption is not recognized under California law.
  3. The regulations also provide for a triennial adjustment of the salary levels, so that the EAP minimum will remain at the 40th percentile of earnings of full-time salaried workers in the lowest wage Census Region, and the minimum for HCEs will remain at the 90th percentile of full-time salaried workers nationally.
  4. Employers are also now permitted to use nondiscretionary bonuses and incentive payments to satisfy up to 10 percent of the new minimum salary level.
  5. The Impact on California Employers. Under current California law, to be considered exempt, an EAP employee must earn a monthly salary that is not less than twice the state minimum wage for full-time employment. As of January 1, 2016, when a state minimum wage law increase to $10 took effect, the minimum annual salary for EAP employees to be considered exempt is $41,600 (twice the minimum wage of a full-time employee working a full year).
  6. Since employers must comply with whatever is the stricter standard under California and federal law, the minimum salary level to classify an EAP employee as exempt will increase as of December 1, 2016 from $41,600 to $47,476. The federal minimum salary will remain the standard in California until January 1, 2019, when the minimum wage in California increases to $12 per hour, and the minimum salary level will, accordingly, increase to $49,920.
  7. It is important to remember that the minimum salary level is only one of several criteria that must be met to lawfully classify an employee as exempt. As with the minimum salary level, federal and state law differ somewhat on the other criteria for exemption from overtime regulations as well. Consultation with an experienced attorney or human resources professional is important in light of the increased scrutiny of employers by governmental authorities as well as employee-side attorneys.
  8. Strategies to Manage Increased Costs Resulting from the New Rule. The increases in the minimum salary level will expand the number of salaried workers who are not exempt from overtime regulations. Employers will be subject to increased costs for such employees, who will be entitled to time and a half or double time for hours worked beyond 40 hours per week or eight hours in a day. Employers should consider whether raising the salary of such employees to the minimum level for exempt employees or modifying or spreading the duties of such employees to decrease overtime pay burdens will more effectively minimize payroll cost increases while maintaining productivity. And any such strategies must be considered with a view of avoiding exposure under other employment laws – for example, discrimination laws that could be implicated if changes impact a particular race or ethnic group, gender or older employees.

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