California’s state minimum wage increased for California’s employers on January 1, 2018. California’s minimum wage law provides for two different rates based on the size of the employer, and the minimum wage increases are reflected in this chart:
|Date||Minimum Wage for Employers with 25 Employees or Less||Minimum Wage for Employers with 26 Employees or More|
|January 1, 2017||$10.00/hour||$10.50/hour|
|January 1, 2018||$10.50/hour||$11.00/hour|
|January 1, 2019||$11.00/hour||$12.00/hour|
|January 1, 2020||$12.00/hour||$13.00/hour|
|January 1, 2021||$13.00/hour||$14.00/hour|
|January 1, 2022||$14.00/hour||$15.00/hour|
|January 1, 2023||$15.00/hour|
Once the rate reaches $15 per hour, it will be adjusted annually based on inflation. Here are five potential pitfalls California employers need to be careful to avoid with the increase in the state minimum wage.
Pitfall #1: Who is considered an employee?
California’s Department of Industrial Relations website provides the following explanation:
Labor Code section 1182.12 defines “employer” as: “any person who directly or indirectly, or through an agent or any other person, employs or exercises control over the wages, hours, or working conditions of any person [and] includes the state, political subdivisions of the state, and municipalities.”
Any individual performing any kind of compensable work for the employer who is not a bona fide independent contractor would be considered and counted as an employee, including salaried executives, part-time workers, minors, and new hires.
The DIR admits that California’s minimum wage statute does not specify how employers should count employees to determine if they have more or less than 26 employees. For example, the law does not provide a time period that employers could use to calculate the average number of employees in determining whether or not they meet the 26 employee threshold. Therefore, employers should be very conservative in making this calculations, and if there is any doubt or the calculation is close, employers should consider paying the higher minimum wage rate rather than risk an audit or costly lawsuit over the difference in rates.
Pitfall #2: The salary level to qualify as an exempt employee increases based on the state minimum wage.
Employers need to review the base salary for all exempt employees to ensure the employees meet the salary required to be exempt. To be exempt from the requirement of having to pay overtime to the employee, the employee must perform specified duties in a particular manner and be paid “a monthly salary equivalent to no less than two times the state minimum wage for full-time employment.” (Lab. Code, § 515, subd. (a).) For more information about the salary basis test for exempt employees, see my previous article here.
With the increase in the state minimum wage in 2018, the equivalent of two times the minimum wage of $10.50 per hour for small employers equals $43,680 per year, and two times the minimum of $11.00 per hour for large employers equals $45,760 per year to qualify for the white collar exemptions.
It is important to note that the salary basis test is set according to the California state minimum wage, not the applicable minimum wage that may apply in the various local city and counties in California.
Pitfall #3: Which minimum wage rate applies if the number of employees raises and falls below 26 employees throughout the year?
The California Department of Industrial Relations provides that: “An employer with 26 or more employees at any time during a pay period should apply the large-employer minimum wage to all employees for that pay period.” It is important to note that the DIR’s opinion is not binding on a court of law, but it can be instructive of the position the state would take in its own enforcement actions.
Changing the rate of pay for each pay period raises another pitfall about the notice employers are required to provide employees before changing their rate of pay (see pitfall #4 below).
Likewise, employers with exempt employees who are earning at or near the two times salary basis required to qualify as an exempt employee (see pitfall item #3 above), and whose number of employees may increase during the year to 26 or more employees, need to be careful about the salary amounts being paid to employees. If there is a chance that the employer’s workforce could increase to 26 or more employees, the employer should take a conservative approach and pay the higher salary amounts required for employees to meet applicable exemptions.
Pitfall #4: Employers are required to update the notice to employees setting forth the employee’s rate of pay.
California employers are required to provide non-exempt employees with certain information upon hire as required by the Wage Theft Protection Act. The law became effective in 2012 and is codified at Labor Code section 2810.5. Many employers use the Labor Commissioner’s template to meet this notice requirement.
However, employers who pre-populate the form will need to revise the forms to ensure that the wage rates comply with the increased minim wage rate in 2018. Likewise, it is a good practice to review the notices mid-way through the year to ensure compliance with the various local cities and counties (such as Los Angeles and Santa Monica) that typically increase their minimum wage rates in July each year.
Employers are not required to re-issue the Notice to Employee to existing employees with updated wage information as long as new increased rate is show on the employee’s pay stub with the next payment of wages. The DIR publishes a great FAQ on the law here that employers should review.
Pitfall #5: Employers still need to comply with local city or county minimum wage requirements if those laws provide a higher minimum wage rate.
Employers need to review any applicable local city or county laws that may provide for a higher minimum wage than the state minimum wage requirement. Employers must comply with the highest minimum wage rate applicable to their workforce. It is also important to review the local minimum wage ordinances as many ordinances differ in how to determine if the employer is small or large, and usually contain their own notice requirements. A list of the various local minimum wage ordinances across the United States is published by UC Berkley Labor Center.