The New Federal Overtime Rules are Here: How it Impacts California Employers

UPDATE ON 11/28/16: The Federal Overtime Rules, which would have mandated a minimum annual salary of $47,476 for exempt employees and were set to take effect on December 1, 2016, have temporarily been halted by a Texas federal judge. The court issued a preliminary injunction, which preserves the current federal overtime rules (which mandates a minimum annual salary amount of $23,660 for exempt employees), while it determines the Department of Labor's authority to make such changes. Thus, at this time, employers across the nation do not have to take action by December 1, 2016 to either increase exempt employees' salaries to $47,476 or reclassify them as non-exempt.

Remember, California's current minimum annual salary for exempt employees remains $41,600. On January 1, 2017, it rises to $43,680 (New minimum hourly wage of $10.50 x 40 hours x 52 weeks x 2). Shivani Sutaria Law Offices will keep you updated with developments as they arise.

Under federal and California law, “white collar” employees can be classified as “exempt” and thus not eligible for overtime compensation if they satisfy two separate criteria: 1) Meet legally defined job duties within specified exemption categories an AND 2) Earn a minimum salary amount. The federal and California laws are similar, but not identical. On May 18, 2016, the Department of Labor (DOL) dramatically increased the minimum salary threshold for exempt employees under federal law. The new rules are intended to extend overtime eligibility to an additional 4.2 million employees with an expected $12 billion in additional wages to employees over the next 10 years.

California employers are subject to federal and California employment laws, and must comply with the ones that provide employees with more rights and protections. With the new federal overtime law changes, California employers are now tasked with complying with aspects of both laws.

Here are the Key Provisions of the New Federal Overtime Rules and how it Impacts California Employers:

1. The DOL Doubled the Federal Minimum Salary Threshold for Exemptions. The DOL set a new federal minimum salary threshold for “white collar” exemptions (professional, executive, administrative) to $47,476/year or $913/week. Previously, the federal minimum threshold was $23,660 or $455/week.

2. The Federal Minimum Salary Threshold Now Exceeds California’s Threshold.
California employment laws generally provide stronger protections for employees than federal employment laws. But with this minimum salary threshold increase, federal law will be more generous as California’s current minimum salary threshold for exemption is $41,600 (based on current minimum wage of $10/hour x 40 hours per week x 52 weeks per year, doubled). Thus, California employers must comply with the higher federal minimum salary threshold.

3. Bonuses can Count Towards Meeting the Federal Threshold. The new federal overtime law allows for non-discretionary bonuses, incentive payments and commissions to count towards up to 10% of the minimum salary level if paid at least on a quarterly basis. Current California law does not allow for this; there is chatter about whether California law will be revised to adopt this standard.

4. An Increase in the “Highly Compensated Employee” Exemption under Federal Law. This federal exemption category will now require employees to earn at least $134,004/year (up from $100,000/year). California employers should note that California does not recognize this exemption category based primarily on the employee’s compensation level.

5. Automatic Increases to the Federal Minimum Salary Threshold. The new federal overtime rules allow for an update to the minimum salary threshold every three years. Based on projections of wage growth, the federal threshold is expected to rise to more than $51,000 with the first update on January 1, 2020. However, with California’s new gradual minimum wage increases over the next several years (January 1, 2017 – $10.50/hr; January 1, 2018 – $11.00/hr; January 1, 2019 – $12.00/hr; January 1, 2020 – $13.00/hr; January 1, 2021 – $14.00/hr; January 1, 2022 – $15.00/hr), California’s minimum salary threshold will outpace the federal minimum salary threshold by 2019.

6. California Employer’s Should Continue to Follow California's 50% Job Duties Test. California and federal law differ in how they define the term “primarily engaged in” under the job duties test. Federal law simply requires that the “primary duty” of the employee fall within the exempt duties. In California, “primarily engaged in” means that more than 50% of the employee’s work time must be spent engaged in exempt work. The new federal rules did not change its job duties test including its definition of "primarily engaged in". Since California’s job duties test continues to be stricter, employers need to follow that test.

7. Must Meet Federal Minimum Threshold by December 1, 2016. 
Fortunately, the implementation period is longer than the standard 60 days and employers have until December 1, 2016 to comply with the new federal overtime minimum salary threshold.

Shivani Sutaria Law Offices is available to further explain the new federal overtime rule, how it co-exists with California law, analyze questionable exempt classifications, and advise employers on compliance strategies.