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California increases minimum wage, in two steps, to $10 per hour
October 24, 2013
California Law Alert
Author(s): Dale A. Hudson, Paul R. Lynd

California approved increases in the minimum wage to $9 per hour starting on July 1, 2014, followed by an increase to $10 per hour on January 1, 2016. Not only do employers need to comply, they need to review salaries for exempt employees.

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For the first time in over five years, California employers must contend with an increase in the state’s minimum wage. On September 25, 2013, California Governor Jerry Brown signed Assembly Bill 10. The legislation increases California’s minimum wage in two steps. First, on July 1, 2014, the minimum wage will increase to $9 per hour. Second, on January 1, 2016, it increases again to $10 an hour.

Before passing the bill, the Legislature removed a provision that would have increased the minimum automatically every year at the rate of inflation. California’s minimum wage last increased to its current level of $8 per hour on January 1, 2008, after having risen in 2007. With this latest increase, California’s minimum wage is among the highest in the nation. It is on track to be perhaps the highest in the nation, depending on adjustments elsewhere that may happen before 2014. The federal minimum wage has been $7.25 since 2009. Employers must comply with the highest applicable rate, which also may be a higher local rate.

In addition to complying with the new minimum wage for non-exempt employers, California employers also need to be mindful that other minimum rates increase along with the state’s minimum wage. California requires that overtime exempt employees be paid a minimum monthly salary of at least twice the state’s minimum wage. The state’s commission pay exemption also requires minimum pay for each hour of at least 1.5 times the state’s minimum wage, with at least half of the employee’s earnings representing commissions. In addition, the state’s collective bargaining exemption from daily overtime rules requires minimum hourly pay at least 30 percent higher than the state’s minimum wage.

The two-phase increase in the minimum wage will change California minimum pay thresholds tied to the state minimum wage, as follows:

Minimum wage

$8.00

$9.00

$10.00

Effective date

1/1/2008

7/1/2014

1/1/2016

Minimum monthly salary for exempt executive, administrative and professional employees

$2,773.33
($33,280
per year)

$3,120.00 ($37,440 per year)

$3,466.67 ($41,600 per year)

Collective bargaining exemption

$10.40/hour

$11.70/hour

$13.00/hour

Split shift premium (if applicable)

$8.00

$9.00

$10.00

The minimum wage increase will not affect the pay thresholds for the computer software professional exemption or the physician employee exemption. The state’s Department of Industrial Relations adjusts these minimums annually based on the rate of inflation.

The higher pay thresholds will apply to all employees who are based in California. In addition, pursuant to the California Supreme Court’s decision in Sullivan v. Oracle, these thresholds may apply to out-of-state residents working temporarily in California.

What employers should do

Companies with employees in California will need to prepare to adjust compensation levels to comply with these new thresholds. The greatest impact will certainly be on minimum wage workers, who will be directly impacted by the new pay rates. In addition, employees currently just above the minimum wage may also receive pay adjustments, as employers attempt to maintain the appropriate relative pay levels with respect to employees possessing varying levels of skill and experience.

Employers also need to review the minimum salary paid to employees classified as overtime exempt under the executive, administrative, and professional exemptions. The minimum “salary” required for these exemptions must be a fixed amount and guarantee that it meets at least the minimum; other amounts paid would not count for the minimum if they are not guaranteed. If the minimum salary rule is not met, an employee would not qualify as overtime exempt, regardless of the employee’s duties.

Companies with employees who regularly travel to California should review carefully whether the new California minimum wage, and possibly other California wage and hour requirements, applies while those employees are working in California.

Watch out for higher local minimum wage requirements

Employers must also be careful to comply with any higher local minimum wage that may apply. The state’s minimum wage law does not preempt local ordinances requiring payment of a higher minimum wage. Currently, two California cities have minimum wages higher than the state minimum wage for all employees. San Francisco’s minimum wage currently is $10.55 an hour, but adjusts at the beginning of each year with the inflation rate. The San Francisco minimum wage applies to time worked within the City and County of San Francisco, as long as an employee works at least two hours a week in the City, even if he or she ordinarily works elsewhere.

San Jose’s current minimum wage is $10 per hour, thanks to an initiative approved by voters effective January 1, 2013. On January 1, 2014, San Jose’s minimum will increase to $10.15 an hour. Additionally, Long Beach, Los Angeles, and Emeryville have passed higher minimum wages for some hotel employees. Other localities have “living wage” ordinances for some contractors.

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The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.