March 20, 2014 Obama Overtime Initiative Unlikely to Have Major Impact in California

Last week President Obama directed the Secretary of Labor to revise the Fair Labor Standards Act (FLSA) regulations so that fewer employees will qualify for overtime exemptions.  But the changes sought by the President are unlikely to have much of an effect in California, because the overtime exemptions under state law are likely to remain more restrictive than those under the FLSA.

Discussion

Overtime exemptions allow employers to exclude certain employees from overtime rules, and to pay them fixed salaries regardless of the number of hours they work each week.  The most common overtime exemptions are those for executive, administrative and professional employees—the so-called “white collar” exemptions.  To qualify for these exemptions, employees must have job duties that satisfy certain criteria, including responsibilities that require discretion and independent judgment.

The FLSA regulations currently allow an exempt employee to perform some “nonexempt” tasks that do not meet the criteria for the exemption.  The employee can even spend a majority of working time on nonexempt tasks, provided the employee’s “primary duty”—the most important duty or principal function—is the performance of the executive, administrative or professional “exempt” work that qualifies the employee for the exemption.  In addition to having a “primary duty” that qualifies for an exemption, for purposes of federal law, a white collar exempt employee must be paid a salary of at least $455 per week.

Press reports indicate the President has at least two specific changes in mind.  First, the administration may change the “primary duty” test so it can only be satisfied when more than 50% of the employee’s working time consists of “exempt” work.  Second, the administration apparently intends to raise the minimum weekly salary.

Employers in California should be aware that California has its own “white collar” overtime exemptions that are similar, but not identical, to their FLSA counterparts.  Among the most notable differences is that California’s “primary duty” test already limits the exemptions to employees who spend more than 50% of their working time performing “exempt” work.  So the President’s intended change to the FLSA’s “primary duty” test will, if implemented, simply make the FLSA exemptions more like California’s.

Another important difference between the California and FLSA white collar exemptions is the minimum salary.  While the FLSA minimum salary for white collar exempt employees has remained at $455 per week since 2004, California’s minimum salary is pegged at twice the state minimum wage for a 40-hour workweek.  Under the current $8 per hour California minimum wage, the minimum salary is $640 per week.  The state minimum wage is scheduled to rise to $9 per hour in July 2014, which will raise the minimum salary to $720 per week.  California’s minimum wage is scheduled to rise again to $10 per hour in January 2016, raising the minimum salary to $800 per week.  So even if the FLSA minimum salary rises substantially, it is unlikely to exceed California’s minimum salary any time soon.

What This Means

California employers are subject to both federal and state law.  An employer that wishes to pay an employee a fixed salary must ensure the employee satisfies all the criteria for both the FLSA and California overtime exemptions.  The California exemptions are substantially more restrictive than those provided by the FLSA, and are likely to remain so, even if the Obama administration succeeds in narrowing the federal exemptions.

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.