To qualify as an exempt employee, California requires that an employee must be “primarily engaged in the duties that meet the test of the exemption” and “earns a monthly salary equivalent to no less than two times the state minimum wage for full-time employment.” Labor Code section 515. This forms the two-part test the employees must meet to be exempt: (1) the salary basis test and (2) the duties test. Here are five general issues employers should know about the salary basis test going into 2019:
1. Salary required to meet “white collar” exemption increases on January 1, 2019.
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).) 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 employer 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 “white collar” exemptions. Therefore, on January 1, 2019, in order to qualify for a white collar exemption, the employee must receive an annual salary of at least $49,920 for large employers and $45,760 for small employers.
2. Salary must be predetermined and guaranteed.
The court in Negri v. Koning & Associates set forth that in order to qualify as a “salary” the pay “must still be a predetermined amount that is not subject to reduction based upon the quantity or quality of work.” Therefore, bonuses, commissions, and other payments made to the employee during the course of the year are usually not considered part of the employee’s salary to qualify as exempt. Employers need to be careful about the salary calculation to ensure the employee is paid a sufficient salary that qualifies the employee as exempt.
3. The employee’s salary cannot be reduced for quality or quantity of work.
In Negri v. Koning & Associates (2013), an insurance claims adjuster challenged his employer’s exempt classification of his job. The plaintiff was paid $29 per hour with no minimum guarantee, and when he worked more than 40 hours in a week, he still only received $29 per hour. The employer attempted to argue that the plaintiff was an exempt employee under the administrative exemption. The court rejected the employer’s position in holding that because the employee did not receive a guaranteed amount in “salary”, the employee did not meet the salary basis test to qualify as exempt. In determining what constitutes a salary, the court looked to federal law:
An employee is paid on a “salary basis” if the employee “regularly receives each pay period on a weekly, or less frequent basis, a predetermined amount constituting all or part of the employee’s compensation, which amount is not subject to reduction because of variations in the quality or quantity of the work performed. Subject to the exceptions provided in paragraph (b) of this section [(relating to absences from work)], an exempt employee must receive the full salary for any week in which the employee performs any work without regard to the number of days or hours worked. Exempt employees need not be paid for any workweek in which they perform no work. An employee is not paid on a salary basis if deductions from the employee’s predetermined compensation are made for absences occasioned by the employer or by the operating requirements of the business. If the employee is ready, willing and able to work, deductions may not be made for time when work is not available.” (29 C.F.R. § 541.602(a) (2012)
Therefore, because the plaintiff’s pay varied according to the amount of time he worked, and was not guaranteed a base amount, he did not meet the salary basis test and was found to be non-exempt.
4. If misclassified, the employee is entitled to unpaid overtime.
For all non-exempt employees, overtime is owed at a rate of one and one-half times the employee’s regular rate of pay for all hours worked in excess of eight hours up to and including 12 hours in any workday, and for the first eight hours worked on the seventh consecutive day of work in a workweek. Double the employee’s regular rate of pay is owed for all hours worked in excess of 12 hours in any workday and for all hours worked in excess of eight on the seventh consecutive day of work in a workweek. California’s Department of Industrial Relations FAQ on California overtime provides a good overview of the overtime requirements under California law. In addition to the unpaid overtime that is owed to misclassified employees, employers also fact substantial penalties that accrue as a result of the employee not being paid all wages when earned.
5. Employers bear the burden of proof in establishing the exemption.
California courts have made clear that the employer bears the burden of proof when asserting that an employee is an exempt employee. “[T]he assertion of an exemption from the overtime laws is considered to be an affirmative defense, and therefore the employer bears the burden of proving the employee’s exemption.” Ramirez v. Yosemite Water Co. (1999).