Question: I have two salaried employees in my business and I do not pay overtime when they work long hours.  I reviewed their job duties last year and feel comfortable with classifying these two managers as exempt employees. But, I run a low margin business and cannot afford to pay them more than is required to qualify for overtime exemption.  I know minimum wage effects this requirement, but I think a new federal law does too.  Can you explain how much these managers must earn to qualify as exempt from overtime?
Answer: Employers and Human Resource professionals know that proper classification of employees as exempt or non-exempt is one of the most complicated areas of the law.  You already recognize the most important lesson; one cannot simply pay an employee a salary and assume they are exempt from overtime.  Rather, to qualify as exempt from overtime, workers must satisfy tests related to both job duties and salary (i.e., performing work that qualifies for an exemption, and receiving sufficient pay).
The salary test has typically been easier to satisfy. Until recently, employers were generally safe if they paid exempt employees a salary that satisfied the California salary standard, which was significantly higher than the federal standard. Due to new Department of Labor regulations taking effect December 1, 2016, the federal salary requirement will soon be higher than California’s salary requirement, and employers must ensure their exempt employees meet the new federal salary test in order to remain exempt from overtime pay.
Currently California requires executive, administrative and professional (“EAP”) employees to earn at least double what they would receive for working forty hours per week at minimum wage, to qualify as exempt. At the current state minimum wage ($10/hr.), that is $800 per week, or $41,600 per year.    Under federal law, beginning December 1, 2016, exempt EAP employees in California will have to be paid the federal minimum salary of $47,476 per year ($913 per week) to remain classified as exempt employees.
California’s minimum wage will rise over the next few years, until it reaches $15 per hour in 2022.  As a result, the minimum salary for exempt status of EAP employees will continue to rise.  For now, ensure that your EAP employees’ salaries are at least $913 per week, but also consider using the new regulations as an opportunity for a broader review of your classification and compensation decisions.  Consider the following:

  • Audit ALL exempt positions – not just EAP employees. New regulations provide a sensible time to revise job descriptions, and to properly classify employees who may now be non-exempt.
  • If raises are required to maintain certain positions as exempt (now, and in the next few years), evaluate the overall impact on budgeting, and whether other options make better economic sense. These may include: paying hourly wages plus overtime; hiring additional workers to avoid overtime; or, reallocating job duties and potentially outsourcing some.
  • Develop communication plans explaining reclassifications. Address employee morale issues potentially arising from employees’ perceived loss of status and actual loss of pay.  Prepare to explain the reasons for raises (to satisfy the new requirements) or reclassification.
  • Train reclassified employees and their managers about timekeeping requirements, meal and rest period laws, recordkeeping, restrictions on telecommuting, and prohibit working “off the clock.”