Patchwork of Laws Makes Employee Classification Harder Than Ever for California Employers

California interstate highway shieldEmployee classification has always been difficult for employers in California due to differences between California law and federal law.

Until recently, the most significant difference has been that California requires that most overtime-exempt employees spend at least 50 percent of their time performing certain duties, while federal law does not.

But two recent developments – the passage of a bill that will increase California’s minimum wage to $15 over the next seven years, and the new Fair Labor Standards Act (FLSA) regulation that will raise the minimum weekly salary for most overtime-exempt employees to $913 effective December 1, and then establish tri-annual inflation adjustments starting in 2020 – will make employee classification more difficult than ever for California employers.

Because California law ties its overtime exemptions to the minimum wage (by requiring that most overtime-exempt employees be paid a salary equal to at least twice the minimum wage), and because California’s minimum wage will soon differ depending on the size of the employer, an ever-shifting patchwork of salary minimums will soon emerge that California employers will need to navigate in the years ahead:

Date California Minimum Wage – Large Employers California Minimum Wage – Small Employers California Minimum Weekly Salary – Large Employers California Minimum Weekly Salary – Small Employers Federal Minimum Weekly Salary
Current $10.00 $10.00 $800 $800 $455
Dec. 1, 2016 $10.00 $10.00 $800 $800 $913
Jan. 1, 2017 $10.50 $10.00 $840 $800 $913
Jan. 1, 2018 $11.00 $10.50 $880 $840 $913
Jan. 1, 2019 $12.00 $11.00 $960 $880 $913
Jan. 1, 2020 $13.00 $12.00 $1,040 $960 Adjusted for inflation
Jan. 1, 2021 $14.00 $13.00 $1,120 $1,040 (Same as 2020)
Jan. 1, 2022 $15.00 $14.00 $1,200 $1,120 (Same as 2020)
Jan. 1, 2023 $15.00 $15.00 $1,200 $1,200 Re-adjusted for inflation
Jan. 1, 2024 Adjusted for inflation Adjusted for inflation Adjusted for inflation Adjusted for inflation (Same as 2023)

Except in very rare cases where an employer is exempt from the federal FLSA but not California’s overtime laws, or vice versa, employers will need to comply with whichever salary minimum is most favorable to the employee.

Further complicating matters is the fact that an hourly, nonexempt employee’s regular rate of pay must never fall below the minimum wage. With the federal government roughly doubling the salary minimum in one fell swoop, many employers are considering whether it is more cost-effective to simply reclassify salaried, exempt employees as nonexempt and then pay them overtime rather than raise their salaries to the new minimum to retain their exempt status. This is a more feasible approach in states where the minimum wage remains at or near the current federal minimum of $7.25 – but will become more difficult in California with each passing year as its minimum wage rises toward $15.

For example, consider a salaried, exempt employee who currently earns the California minimum weekly salary of $800 and usually works 55 hours per week. Rather than raise her weekly salary to $913 when the new federal minimum takes effect on December 1, her employer might choose to reclassify her as nonexempt and pay her an hourly wage of $12.80. This would keep her total weekly compensation constant at $800 ($12.80 an hour for the first 40 hours plus $19.20 (time and a half) for the 15 overtime hours equals $800). But this approach would no longer pass muster in 2020 when the minimum wage for large California employers reaches $13.

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