Happy New Year!  This Friday’s five video covers five reminders about the minimum wage increase:

1. 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). 

2. 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.

3. Salary amount need to be guaranteed, fixed amount.

4. The law also requires that the employee perform more than 50% of their time performing exempt duties. 

More information about the types of duties that qualify for the white collar exemptions can be read at my prior post here.

5. Employers bear the burden of proof to establish the exemptions.

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 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 “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).

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.

Welcome to Friday’s Five!  Here are five video excepts from a presentation I conducted in September 2016 to a group of restaurateurs:

  • exempt employee overview
  • the DOL’s increase in the salary basis test and what it means for employers
  • California’s minimum wage – state and local considerations

 

Please let me know if you have any questions or suggestions for topics you would like to see discussed.  Have a great weekend.

To qualify as an exempt employee, 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.  Yes, this Friday’s Five post is published on a Saturday, but a holiday party obligation got in the way (it did cross my mind, but I saved my readers from the obligatory “how to throw a holiday work party and avoid litigation” article – so I figured this will make up for the late post).  Here are five general issues employers should know about the salary basis test:

1.     To qualify for a “white collar” exemption, employees must be paid at least twice the state minimum wage.

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 July 1, 2014, the minimum wage in California increased from $8.00 to $9.00 per hour.  It is set to increase again to $10.00 per hour on January 1, 2016.  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 July 1, 2014, in order to qualify for a white collar exemption, the employee must receive an annual salary of at least $37,440, and as of January 1, 2016, the threshold annual salary increases to at least $41,600.  This salary basis will increase with each increase in the California state minimum wage.

2.     DOL proposal to increase the salary for required to meet the salary basis test under the FLSA is just a proposal (for now).

As I have previously written, the Department of Labor announced in June 2015 that it was considering a proposal to increase the salary basis amount under the Fair Labor Standards Act (FLSA) for the white collar exemptions from $23,660 to $50,400.  The Wall Street Journal is reporting that this proposal is not likely to become effective (if at all) until late 2016.  Employers need to understand that the DOL’s proposal pertains to federal law.  California employers need to abide by which ever salary basis level is higher – California state law or the FLSA.  It is important to understand the difference, and keep up to date on the DOL’s proposal in 2016.

3.     The employee’s salary cannot be reduced for quality or quantity of work.

In a recent case, 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.     Approach with caution.

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).

Photo:  Justin Lynham

1.     It does not matter if you are a start-up, mom and pop business, or a fortune 500 company, employment laws cannot be ignored. 

While different laws do apply to larger employers, for the most part, every employer has to comply with roughly the same laws in California.  California’s paid sick leave requirement that took effect in 2015 is a good example, there is no exception for small businesses.  If the employer has one employee, the employer must offer paid sick leave in accordance with the law.  Think you are too “small” to be a target?  The penalties add up very quickly for very technical violations, such as not providing all of the required information on an employee’s pay stub.  Plus, the Labor Commissioner just received more authority in pursuing judgments against employers starting in 2016, including the ability to hold business owners personally liable for unpaid Labor Commissioner judgments.

2.     Not every employee can be exempt. 

There are many different exemptions available that “exempt” employees from certain Labor Code requirements, such as overtime pay.  However, to qualify for a “white collar” exemption, employees must meet a two factor test: (1) salary basis test and (2) duties test.  To pass the salary basis test, exempt employees must be paid the equivalent of two times the state’s minimum wage for a 40 hour week.  As of July 1, 2014, the minimum wage in California increased from $8.00 to $9.00 per hour.  It is set to increase again to $10.00 per hour on January 1, 2016.  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 July 1, 2014, in order to qualify for a white collar exemption, the employee must receive an annual salary of at least $37,440, and as of January 1, 2016, the threshold annual salary increases to at least $41,600.

Don’t forget, the analysis does not stop there, the employee must also pass the duties test.  Generally, this means that more than one-half of the employee’s work time must be spent engaged in exempt work.  This differs substantially from the federal test which simply requires that the “primary duty” of the employee falls within the exempt duties.

3.     Companies must be careful about vacation policies under CA law.

The Wall Street Journal reports that Zenefits, a HR software and insurance provider based in San Francisco, is dealing with potential unpaid vacation claim from its own employees.  Zenefits has raised $500 million at a $4.5 billion valuation, and has provided a new model to the insurance sales industry by providing free HR software to its users, in exchange for the opportunity to become the client’s insurance and benefits broker.  The company is offering former employees on average $5,000 to resolve a potential dispute regarding its vacation policy.  It appears from the reports that the company switched from a vacation policy that provided very specific vacation accrual rates to an unlimited vacation policy.  During the switch, however, it is reported that the company did not pay out the vacation that was accrued under the previous policy.  California law is very specific, and requires that companies pay all accrued but unused vacation upon separation from the company, and does not permit “use-it-or-lose-it” vacation policies.

4.     Employees must be paid for all wages, including all accrued but unused vacation at time of termination. 

My previous Friday’s Five article addresses the timing requirements for when wages and unused vacation must be paid to employees separating from a company.

5.     Start-up mentality of “ask for forgiveness” can cost a lot of money in California.

While an aggressive strategy may be good for creating a business, breaking into a new industry, or created a new product, the strategy is the opposite of how employers should operate in regards to complying with employment laws in California.  While it takes time, and a relatively small amount of money to come into compliance up front, this investment is much smaller than the hundreds of hours and huge costs spent defending litigation.

Photo: Shelly Prevost

In July 2015, the Department of Labor proposed regulations that would increase the salary amount employers would need to pay for employees to qualify as exempt.  If adopted, the proposal would require that employees would have to earn at least $50,440 per year in order to qualify for most exemptions in 2016.  This episode discusses how the proposal may effect California employers.