On March 7, 2019, the United States Department of Labor (“DOL”) issued a proposed rulemaking to increase the salary level that employees must receive in order to qualify as an exempt employee. The DOL sets standards under the Federal Labor Standards Act (“FLSA”), but California employers are also required to comply with California’s wage and hour laws. This Friday’s Five reviews five issues California employers need to understand about the DOL’s proposal and how it may affect them:
1. DOL’s proposed salary threshold for exempt employees.
The DOL’s proposal increases the minimum salary required under the FLSA for an employee to qualify as an executive, administrative or professional exemption (referred to as the “EAP” exemption) from the currently-enforced level of $455 to $679 per week (equivalent to $35,308 per year).
Since 2004, the salary required under the FLSA was set at $23,660 per year. The Obama administration proposed rules that would have required employers to pay employees that qualify for the EAP exemption a minimum salary level of at least $921 per week or $47,892 annually. The Obama administration rules were set to take effect on December 1, 2016, but were blocked by a lawsuit filed by 21 states. The March 7, 2019 proposed rules lower the salary requirement by about $12,000 as compared to the Obama administration proposed rules.
The DOL’s proposed rules are expected to become effective in January 2020.
2. DOL also increased the total annual compensation required for “highly compensated employees.”
The proposal increases the total annual compensation requirement for “highly compensated employees” (“HCE”) from the currently-enforced level of $100,000 to $147,414 per year. This amount is about $13,000 higher than the proposed rule under the Obama administration.
3. The DOL did not propose any changes to the job duties test and did not set any automatic increases to the salary levels.
There were no changes to the job duties test that is required to qualify as an exempt employee. In addition, there are no future automatic adjustments to the salary threshold.
4. California employers must still comply with California’s more stringent standards regarding exempt employees.
Under California law, exempt employees 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(a).) As of January 1, 2019, the minimum wage in California increased from $11.00 to $12.00 per hour for employers with 26 or more employees (the increase is from $10.50 per hour to $11.00 per hour for employers with 25 or fewer employees on January 1, 2019). With the increase in the state minimum wage, there is a corresponding raise in the minimum salary required to qualify as exempt under the EAP exemptions.
Therefore, on January 1, 2019, in order to qualify for an EAP exemption under California law, the employee must receive an annual salary of at least $49,920 for large employers and $45,760 for small employers.
In addition, California does not permit employers to consider bonuses, commissions, or other payments made to the employee during the year as part of the employee’s salary to meet the minimum threshold. Finally, California does not contain a “highly compensated employee” exemption.
5. Don’t forget about the duties test.
With attention on the DOL’s salary increase required to meet the EAP exemptions, it is important for employers to remember that this is only one-half of the test used to qualify as an exempt employee. The law also requires that the employee perform more than 50% of their time performing exempt duties. The duties that qualify as exempt can be difficult to determine, and many industries, such as insurance claim adjusters, financial service industry employees, executive assistants, and purchasing agents are just a few job classifications that have been the subject of litigation in the past.