California employers must brace themselves for significant changes in light of proposed amendments to the federal exempt versus non-exempt employee classification. As it pertains to employment law, when there is a conflict between federal and state law, the law most favorable to the employee will apply. If you are a California employer, then you are likely aware that California employment laws are often more favorable to employees. For that reason, while remaining cognizant of federal law, in practice, California employers have mostly abide by California law.
As employers and employees alike are aware, the distinction between exempt and non-exempt status is critical. While a non-exempt employee is eligible for overtime, an exempt employee is well… exempt. Obviously, if you are an employer with employees an employee that customarily work more than 40 hours a week or 8 hours a day, you can save thousands (or even millions, depending on the size of your company) of dollars per year by classifying that employee as exempt, and avoid paying overtime.
The federal agency that governs classification of exempt and non-exempt employees is the Fair Labor Standards Act (“FLSA”). The Department of Labor (“DOL”) prescribed the exemptions under which employers were allowed to classify their employees as exempt. One of the manners in which an employee can qualify as exempt is if they fit within the “white collar exemption.” For many years, California had rules that were more favorable employees, meaning that California employers did not abide by the federal rule. As a result, many California employers may not be as familiar with the federal rule. Below is the FLSA white collar exemption in its current form:
Salary– In order to qualify under this exemption, the employee must receive a predetermined and fixed salary.
Wage Requirement– The employee must be paid $455 per week ($23,660 for a full year employee)
Work a “white collar” profession– Most of the employee’s duties must be categorized as executive, administrative, or professional.
As of the date of this writing, California employers must pay their employees more than the FLSA requires to qualify for the white collar exemption. The California salary requirement is a product of the minimum wage dictated by the wage order. In addition to being paid a predetermined and fixed salary, and performing duties deemed as white collar California requires that employers pay their employees a salary of at least twice the California minimum wage. As of January 1, 2016, when the California minimum wage increased to $10 an hour, the required salary for exempt employees is $800 per week or $41,600 per year.
What is proposed to change?
As mentioned in the opening paragraph, the DOL’s proposed changes would have a significant impact on both California employers and employers. The highlights of the proposed changes are as follows:
Wage Requirement Increase– The proposed change would increase wage requirement from $455 per week to $970 per week ($50,440). In setting that salary, the DOL attempted to meet the 40th percentile of the weekly earnings for full-time salaried workers nationwide.
Automatic Salary Adjustments for inflation– To keep the salary requirement equal to the 40th percentile of the weekly earnings for full-time salaried workers year-after-year, employee salaries would automatically adjust each year.
Highly Compensated Employees increased to the 90th percentile- For an employee to qualify as a highly compensated employee, that worker must be paid the annualized value of the 90th percentile of full-time salaried workers ($122, 148).
Impact of the Changes
Obviously, the impact of these changes has a lot to do with perspective. If you are an employee that is currently classified as exempt, these proposed changes may seem like a good thing. To continue to avoid paying overtime, employers would give pay raises to exempt employees that just barely make the wage requirement threshold. For that same reason, these proposed changes likely are an employer’s worst nightmare.
Nevertheless, if the law is enacted, the truth is that both sides may lose. If employers are forced to significantly increase wages, then they might change many of their salaried employees to hourly, reduce hours of work for hourly employees, and/or layoff many employees. Furthermore, it may hinder the employer’s ability to expand. Therefore, regardless of whether you are an employer or employee, it would be prudent to think critically about whether or not the proposed changes should be enacted.
In most instances, the public is at the mercy of the DOL’s when rules are changed. Fortunately, the DOL considered comments from the public in determining the final changes. Regrettably, given the anticipated late 2016 release of the final changes, the opportunity to leave comments may have elapsed. Hopefully, the public took a sincere interest in the changes that could have occurred and opened thoughtful dialogue with the DOL to come up with a rule that best helps employees and employers.
It is important to note that every employment law situation is unique and this Employment Law Legislative Update is not a replacement for legal counsel. If you have questions on how these changes may affect your business, contact the Employment Law Department at Young Wooldridge, LLP.