California's minimum wage is rising, and with it so is the minimum salary for exempt status

April 04, 2016

Employment Law Alert

Author(s): Robert Dolinko, Marjorie S. Fochtman

California recently passed legislation that will ultimately increase the state minimum wage to $15 per hour for most hourly workers, but the increase has implications beyond the minimum wage. This alert discusses what businesses need to know.

California has the world’s eighth largest economy. The cost of doing business in that economy is going up once again. On Monday, April 4, 2016, Governor Brown signed into law minimum wage legislation that will become effective on January 1, 2017.

The minimum wage hike to $15

The primary effect of Senate Bill No. 3, which amends Cal. Labor Code §1182.12, is to increase the state minimum wage on an annual basis for virtually all California workers. For employers with at least 26 employees, the minimum wage will be $10.50 per hour in 2017; $11 per hour in 2018; $12 per hour in 2019; $13 per hour in 2020; $14 per hour in 2021; and $15 per hour in 2022. Thereafter, the state director of finance will apply an unwieldy formula to determine additional annual increases in the minimum wage based on changes in the Consumer Price Index. For employers of 25 or fewer employees, these same wage increases will go into effect—only one year later than the effective date for larger employers.

The new law includes a provision that calls for the state director of finance to analyze various California financial conditions and report annually on those conditions to the governor. The governor is in turn empowered to make “a final determination on whether or not to temporarily suspend a minimum wage increase”—although the governor may only do so “no more than two times.”

The increase in the minimum wage will have a significant impact on businesses that employ many low-wage individuals. Notably, the law contains no exemption for nonprofits or for restaurants and other service businesses where a significant portion of employee compensation is in the form of tips. The new law also will likely negatively impact businesses in rural areas more than businesses in urban areas that generally pay higher wages or are subject to municipal ordinances that call for higher minimum wages. For example, the Los Angeles Minimum Wage Ordinance that is to take effect on July 1, 2016 calls for higher minimum wages sooner than those set forth in new state law.

Other compensation minimums linked to the minimum wage are also impacted

California’s new minimum wage law is also significant because certain other minimum pay requirements increase along with the state’s minimum wage. To be exempt, a California employee must earn “a monthly salary equivalent to no less than two times the state minimum wage for full-time employment.” Thus, for employers with at least 26 employees, the minimum annual salary for an employee to be deemed exempt will be: $43,680 in 2017; $45,760 in 2018; $49,920 in 2019; $54,080 in 2020; $58,240 in 2021; and $62,400 in 2022. For comparison purposes, the Department of Labor recently proposed increasing the minimum salary test under the federal Fair Labor Standards Act to $50,440 per year.

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, which for employers with at least 26 employees will result in increases as follows: $13.65 in 2017; $14.30 in 2018; $15.60 in 2019; $16.90 in 2020; $18.20 in 2021; and $19.50 in 2022, in order to maintain the exemption from daily overtime rules.

The increase in the minimum wage will also affect the commission sales exemption. To be exempt under the commission sales exemption, more than half the employee’s compensation must be in the form of commissions and the employee must earn at least one and one-half times the minimum wage for all hours worked. This means that by 2022, for employers with at least 26 employees, to be exempt under the commission sales exemption, a commissioned sales employee must earn at least $22.50 per hour.

Be aware of impact on anyone performing work in California

These minimums are not limited to employees based in California. Out-of-state employers who send workers into California should be aware that under the California Supreme Court’s decision in Sullivan v. Oracle, these minimums may well apply to out-of-state employees working temporarily in California.

New York passed similar legislation

California is not alone in increasing the minimum wage. Governor Cuomo of New York State, apparently in tandem with Governor Brown, has signed legislation that will gradually raise that state's minimum wage to $15 per hour in New York City and adjoining counties, and to $12.50 per hour in Upstate New York.

What employers should do now

In light of this latest development, employers should take the following steps:

  • Annually conduct an internal pay audit and ensure compensation levels are adjusted to comply with the new thresholds. The greatest impact will certainly be on minimum wage workers who will be directly impacted by the new pay rates.
  • Annually review minimum salary levels 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 and guaranteed amount of at least the required minimum; other amounts paid would not count for the minimum if they are not guaranteed. If the minimum salary is not met, an employee does not qualify as overtime exempt, regardless of the employee’s duties.
  • Companies with employees who travel to California should determine whether those employees must satisfy the higher California minimum wage or minimum salary tests while working in California.
  • Continue to monitor minimum wage requirements set forth in local ordinances and at facilities that may be locally regulated to ensure compliance with unique minimum wage requirements that exceed even the new state standards.

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.

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