May 18, 2016 A California Perspective on the Obama Administration's Changes to the White Collar Overtime Exemptions

Today the Obama administration announced changes to the regulations governing the so-called “white collar” exemptions for executive, administrative and professional employees under the federal wage and hour law, the Fair Labor Standards Act (FLSA).  The administration announced its proposal to change the regulations in June of last year to much fanfare, noting the regulations had been changed only once since the 1970s.  The proposal unleashed a torrent of political debate and fierce criticism from the business community.  The new regulations, which will go into effect December 1, 2016, reflect some compromise by the administration, as some of the changes do not go quite as far as many in the business community had feared.

This E-Update will summarize the key changes announced today.  California employers should keep in mind that some of the changes will have little or no impact in California.  This is because the requirements for white collar exemptions under California law are already stricter in some respects than the new FLSA regulations, and to be exempt from overtime under both the FLSA and California law an employee must satisfy both the federal and state exemption requirements in full.

Summary of Changes to the FLSA White Collar Exemption Regulations

Here are the key changes to the federal exemption rules scheduled to take effect December 1, 2016:

  • Salary Threshold: The “salary threshold” (minimum salary) will increase from its current level of $455 per week ($23,660 per year) where it has remained since 2004, to $913 per week ($47,476 per year). This level matches the 40th percentile of full-time salaried workers in the lowest income Census region of the country (currently the South). The administration’s initial proposal was to raise the minimum as high as $970 per week ($50,440 per year), so this is one area of compromise. 
  • Nondiscretionary Bonuses and Commissions Can Be Included: For the first time, employers can count nondiscretionary bonuses and commissions to satisfy up to 10 percent of the salary threshold. To be considered, bonuses or commissions must be paid at least quarterly.
  • Automatic Updates to Salary Threshold: The salary threshold will be adjusted every three years to maintain it at the 40th percentile of full-time salaried workers in the lowest income Census region of the country.
  • No Change to Duties Test: In addition to a salary threshold, both the FLSA and California law require white collar exempt employees to have job duties that satisfy specified criteria, including responsibilities that require discretion and independent judgment. In its initial proposal announced last year, the Obama administration indicated it would consider changing the FLSA duties test to require white collar exempt employees to perform exempt duties a certain percentage of their working time (which is the rule under California law). But the final rule announced today leaves the existing duties test in place, reflecting another compromise by the administration.
  • Highly Compensated Employee Threshold: The FLSA provides for a “highly compensated employee” annual salary threshold which, if satisfied, requires only a minimal showing of exempt duties. This annual salary threshold will increase from $100,000 to $134,004.

What This Means for California Employers

While both the FLSA and California law require overtime pay when a nonexempt employee works more than 40 hours in a work week, California’s wage and hour laws go much further, requiring overtime pay when an employee works more than eight hours in a work day or on the seventh consecutive day of a work week, and also requiring employers to provide unpaid meal periods and paid rest breaks.

In order to be exempt from overtime under both the FLSA and California law, an employee must satisfy all the federal and state requirements for one or more exemptions, including being paid a salary that meets or exceeds both the federal and California salary thresholds.  Unlike the new FLSA exemption rules announced today, California law does not allow employers to include bonuses or commissions to satisfy the salary threshold, and California does not have a separate threshold for “highly compensated employees.”  In addition, unlike the FLSA, California’s “duties” test requires exempt employees to spend a majority of their working time performing exempt (as opposed to nonexempt) work consistent with the exemption(s) under which they are classified.

California’s salary threshold for white collar exempt employees is set at twice the state minimum wage for a 40-hour work week.  Under the current $10 state minimum wage, California’s salary threshold is $800 per week ($41,600 per year).  Last month Governor Brown signed a bill that will gradually raise the state minimum wage to $15 per hour by 2022, and by doing so cause corresponding increases in the salary threshold for white collar exempt employees according to the following schedule:

Effective Date

Minimum Wage

Salary Threshold

January 1, 2017:

$10.50 per hour

$840 per week / $43,680 per year

January 1, 2018:

$11.00 per hour

$880 per week / $45,760 per year

January 1, 2019:

$12.00 per hour

$960 per week / $49,920 per year

January 1, 2020:

$13.00 per hour

$1,040 per week / $54,080 per year

January 1, 2021:

$14.00 per hour

$1,120 per week / $58,240 per year

January 1, 2022:

$15.00 per hour

$1,200 per week / $62,400 per year

California’s salary threshold has long exceeded the FLSA’s, but that will change when the new FLSA regulations take effect on December 1, 2016, increasing the FLSA salary threshold to $913 per week ($47,476 per year).  Based on the schedule above, the FLSA salary threshold will be higher than California’s from December 1, 2016 at least through the end of 2018.

The difference between the state and federal minimum salaries will create a “gap” within which employees could be exempt from California’s overtime laws (including daily overtime and meal and rest period requirements) but not federal overtime laws.  Employers who have employees that fall within this gap will need to adjust their current pay practices to begin tracking hours worked by these “gap” employees and paying them overtime under federal law, which requires weekly, but not daily, overtime.

To avoid this awkward “gap” situation, employers may wish to increase salaries to the federal minimum in order maintain exempt status under both state and federal law.  Keep in mind that under the new rule, up to 10 percent of an employee’s standard salary level can come from nondiscretionary bonuses and commissions provided they are paid at least quarterly, so in some cases this may help satisfy the federal salary threshold.  Another alternative is to reclassify employees to nonexempt status and pay them both daily and weekly overtime.  Reclassifying employees will require careful analysis to determine an appropriate hourly rate, and effective communication and training for employees who will transition from exempt to nonexempt status.

What Employers Should Do

Employers should identify any employees currently classified as exempt who may not meet the new federal minimum salary requirement of $47,476 per year, and begin planning to either maintain their exempt status by increasing their salaries to the new FLSA minimum, or develop a comprehensive plan for reclassifying them to nonexempt status, which should include setting an hourly rate, implementing a timekeeping system, providing mandated meal periods and rest breaks, avoiding off-the-clock work, and complying with pay stub requirements.

------------------

This E-Update was authored by Aaron Buckley.  For more information, please contact Mr. Buckley or any other Paul, Plevin attorney by calling (619) 237-5200.