In order for an employee to be exempt from overtime premium pay, they must meet two basic tests: perform certain job duties, and make more than a specified salary. Under current federal law if a full time employee earns less than $23,000 per year, they do not qualify for being categorized as exempt. The $23,000 salary threshold has been the same since 2004. Recently, the White House Office of Management and Budget approved new Department of Labor regulations which will increase the minimum salary of a full time exempt employee to $47,476 per year![i] These new DOL regulations could become effective by December 1, 2016 unless Congress intervenes. The new regulations also provide for the minimum salary for exempt employees to be adjusted every three years to reflect wage growth over time.
As opposed to employers in other states, California employers may not be too concerned about the increase in the federal salary test since California law already requires that most full time employees must make a minimum annual salary of $41,600[ii] in order to qualify for being exempt. So there can’t be too many California employees whose exempt status will be lost by this salary increase from $41,600 to $47,476, right? Wrong!
DOL data indicates that the proposed increase in an exempt employee’s minimum annual wage will result in at least 395,000 California based employees losing their exempt status, and a total of almost 4.2 million employees nationwide losing their exempt status.[iii] In particular it is projected that smaller businesses and non-profit organizations will be disproportionately impacted. This means that for some employers this federal increase in salary for exempt employees could significantly increase their labor costs. Do some of these employees who will lose their exempt status work for your business?
Recently, there has been significant opposition to the proposed increase in the minimum wage for exempt employees both in the courts and in the U.S. Congress. As of the time of writing this article, a bill passed the U.S. House of Representatives on September 28, 2016 which would delay the implementation of the DOL’s proposed increase in the minimum salary of exempt employees from December 1, 2016 to June 1, 2017.[iv] However, even if this bill is also passed by the U.S. Senate, and survives the possibility of a veto by the President, it just delays the implementation of this increase in the minimum salary for exempt employees by a mere six months. Therefore, we believe that it is imperative for California employers to be aware that they may have employees currently being paid as exempt who may soon no longer qualify for this status.
Having a plan regarding this proposed increase in minimum salary for exempt employees can significantly reduce your company’s costs, and keep your business in compliance with the law. We recommend all U.S. based employers identify those exempt employees who earn less than $47,476 a year, and give us a call to explore how you can plan to minimize a significant increase to the compensation costs of your business. A little planning now can minimize increased costs to your bottom line and potential legal exposure under the new regulations.
[ii] Although $41,600 is the minimum salary requirement for most exempt workers, California law has different minimum wage and salary requirements for physicians, computer professionals and outside salespersons.