Question: I read that the Department of Labor (“DOL”) recently proposed changes to the federal overtime laws. I own a small business that employs two managers, who are each paid an annual salary of $44,000, and ten sales associates, who are paid on an hourly basis. Will the new proposed federal overtime law affect my business?
Answer: In March 2019, the DOL proposed new regulations requiring that an individual earn at least $35,308 a year to qualify as an exempt employee. Generally, businesses must comply with the law that provides the most protection for employees. That means that in California, employers must generally comply with California rather than federal law. The DOL’s proposed changes provide fewer protections than California law and as such do not affect your business, but it is important that you comply with California law in properly classifying and paying exempt employees. As explained below, to qualify as exempt employees under California law, your managers must earn a higher salary than they are currently earning.
Under California and federal law, employees can be classified as “exempt” from the overtime pay rules in limited situations. The most common exemptions apply to executive, administrative, and professional employees if they meet both a “duties test” and a “salary test.” Under California law, an employee will qualify as exempt only if the employee is “primarily engaged in” specifically defined exempt duties more than one-half of the employee’s work time. California employers must carefully analyze the actual duties of an employee that is classified as exempt, and the amount of time spent engaged in those duties, to ensure the employee meets the duties test.
Additionally, in California an exempt employee must be paid a salary that is at least two times the state minimum wage for full-time employment. In 2018, when the minimum wage for a business your size was $10.50, the threshold salary for an exempt employee was $43,680, and your managers’ salaries of $44,000/year met the minimum salary requirement. But when the minimum wage goes up statewide, so does the minimum exempt salary. The 2019 state minimum wage for employers with 25 or fewer employees is $11.00/hour, which means that for employers of this size, an exempt employee’s salary must be at least $45,760.00/year in 2019. Because the minimum wage is set to increase on January 1 of 2020, 2021, and 2022, exempt employees’ minimum salary must also increase each year.
In order to continue classifying your managers as exempt, you must confirm that they meet the duties test and increase their salaries to at least $45,760.00/year for 2019. If these managers do not meet the duties test, or you do not want to increase their salaries, you must reclassify them as non-exempt, pay them hourly for all hours worked, train them to clock in and out, and take meal and rest periods. Furthermore, if you reclassify these managers as non-exempt, you must determine if you will allow them to work overtime, which they would now be owed, or if you will limit their work hours and potentially hire additional employees as necessary.
Employers should review their practices annually to ensure compliance with the applicable laws and any updates to the laws. The change in one law can have a domino effect, as in the case of the changes to the minimum wage laws.