Businesses Must Adapt to the Tidal Wave of Wage Legislation

California employers will face a barrage of changes to the wage laws over the next months and years that may affect both exempt and non_exempt employees. Both state and federal laws have recently changed. In addition, many California jurisdictions have their own minimum wage laws. The employee is entitled to the greatest protection provided under any applicable law. As a result, employers must be aware (or beware) of all potentially applicable laws.

On April 4, 2016, California Governor Jerry Brown signed legislation to raise the statewide minimum wage, over time, to $15 an hour. Yet, a mere three years earlier, Governor Brown signed Assembly Bill 10 raising California’s then-current minimum wage from $8 to $9 per hour beginning July 1, 2014, and to the current $10 an hour starting January 1, 2016.

The $10 per hour minimum wage in California now will only last through 2016, as it will increase to $10.50 per hour beginning on January 1, 2017, and will increase each following January 1 until it reaches $15 beginning January 1, 2022, as a result of Assembly Bill 10.

Employers in California are accustomed to being on the leading edge of employee benefits and protection. For example, the current federal minimum wage is only $7.25 per hour. But now, the U.S. Department of Labor has stepped up to take the baton from California, at least temporarily. On May 18, 2016, President Obama announced the U.S. Department of Labor’s final rule updating overtime regulations will become effective December 1, 2016 and, reportedly, will automatically increase overtime protection to more than four million workers within the first year of implementation.

While the new DOL rule does not increase the federal $7.25 per hour minimum wage, it will directly impact whether executives, administrators and professionals will continue to be exempt from overtime pay under provisions of the Fair Labor Standards Act. In general, to be exempt from overtime, employees must exercise discretion and independent judgment on matters of importance (the “Duties Test”). California law requires that an exempt employee must also be paid a salary that is twice the minimum wage of a full time employee (the “Salary Test”). Under the Salary Test, California employees who make less than $41,600 annually cannot be exempt.

The new DOL rule focuses primarily on updating the salary level minimums for executive, administrative and professional employees to be exempt from overtime pay requirements under federal law. Specifically, the DOL rule:

1. Sets the standard salary level at the 40^th percentile earnings of fulltime salaried workers in the lowest wage Census Region, currently the South, at $913 per week; $47,476 annually for a full year worked;
2. Sets the total annual compensation requirement for Highly Compensated Employees (which California does not adopt as part of any exemption standard) to the annual equivalent to the 90^th percentile of fulltime salaried workers nationally ($134,004); and
3. Establishes a mechanism for automatically updating the salary and compensation levels every three years to maintain the levels at the above percentiles, beginning on January 1, 2020.

Additionally, the DOL rule amends the Salary Test to allow employers to use nondiscretionary bonuses and incentive of payments (including commissions) to satisfy up to 10% of the new standard salary level. Based on current wage trends, the DOL projects the salary threshold will be $51,000 by January 2020. This compares to the current California annual salary test threshold of $41,600. So has the Obama administration “out-protected” California? Yes, but only temporarily.

With the stroke of a pen on April 4, 2016, Governor Brown has set into motion annual increases in the minimum wage (which he concedes “economically . . . may not make sense”) that will directly impact the minimum annual salary that must be paid to enable mid-level managers to continue to be exempt from overtime and other wage and hour regulations. Below is a list of the upcoming annual increases in minimum wages for California workers, and the corresponding minimum annual salary they must be paid to continue to be exempt from overtime from wage and hour regulations.

For employers with 25 or fewer employees, these rate increases will be implemented one year later than the above schedule. And beginning August 1, 2022, and on August 1 each year thereafter, California’s Director of Finance will adjust the minimum wage for the following year in accordance with increases in inflation as set by the United States Bureau of Labor Statistics. It should be noted that the Governor will be empowered to suspend the scheduled minimum wage increases if economic factors indicate that the state is in recession.

The Take Away

What does all this mean to California employers? Beginning December 1, 2016, employees that have been exempt under current law from overtime and other wage and hour regulations, must be paid a minimum of $47,476 under federal regulations (not the current $41,600 under California law) to maintain that exempt status, even if they otherwise perform exempt duties as managers, administrators or professionals.

Businesses will now have to decide whether to convert otherwise exempt mid-level managers and administrators to nonexempt status, pay them an hourly wage, and provide all wage and hour protections afforded to non-exempt employees. If they do, many employees will view this change as a demotion or a diminishment of stature in the workplace. Employees often feel more secure receiving a set salary each pay period, something they can rely on. Employees may harbor such feelings even though they would be entitled to receive overtime pay when they work more than an 8-hour day or 40-hour workweek. Alternatively, employers will have to increase the annual salary of exempt employees from the current $41,600 to the new federal Salary Test annual rate of $47,476.

All types of businesses, from flower shops and restaurants to manufacturers and service providers, will have to decide whether to pass along these increased costs to their customers by raising prices or develop creative ways to remain profitable given the increased cost of doing business. On the other hand, for currently exempt managers, administrators and professionals that work considerably more than 8 hours a day or 40 hours a week, it may be more economical to increase their annual salary to the new minimum salary of $47,476. Businesses may also want to consider hiring or promoting more employees as “managers” to minimize overtime hours worked. On the other hand, if otherwise exempt employees primarily work a fixed 8 hour workday, the economics may suggest that paying overtime wages on those periodic occasions when they work more than 8 hours a day or 40 hours a week would seem to be the better way to proceed. One thing is certain, businesses must evaluate what their employees do, how long it takes them to fulfill their job responsibilities, whether duties should be divided with other employees, and whether to transition some (or all) exempt employees to nonexempt after analyzing the financial impact these changes will have.

While California employers, understandably, may be angry at the Obama administration for increasing the Salary Test threshold in this somewhat dramatic manner, the upward pay threshold trend appears inevitable. San Francisco, Los Angeles, Oakland, Berkeley, Richmond, San Jose and other cities across the State have enacted their own minimum wage standards that are not only considerably higher than the federal minimum wage, but higher than what had been California’s statewide minimum wage. California has responded with its own statewide increase.

Conclusion

Businesses must reevaluate their workforce requirements and decide whether to maintain or discard some or all the exempt classifications for their employees. Being angry with the federal government is misguided, as cities and states are already taking action to increase the minimum wage. As always, businesses will need to adapt to survive and prosper. As noted above, by January 1, 2019 the Salary Test threshold in California will become $49,920 per year and will exceed even the new federal minimum. Therefore, whether it is federal legislation or regulation, or California legislation, changes are already here and more are scheduled. Business owners need to get smart and decide how to address the changing economic landscape.