Does the New Fed Overtime Rule Affect California Employers?

The short answer to this question: Not really.

 

Recently, the United States Department of Labor (DOL) issued its final rule increasing the minimum salary test that a worker must meet in order to be classified as exempt under the Fair Labor Standards Act ("FLSA"). The rule increases the federal minimum salary level to $35,568 effective January 1, 2020. Employees who don't meet that minimum salary test are not exempt from overtime and other wage and hour requirements under the FLSA. The final rule also discusses new guidelines for "highly compensated employees" and the use of nondiscretionary bonuses to meet the minimum salary test.

 

On a national level, this new federal overtime will have an impact. According to DOL, an estimated 1.3 million American workers currently classified as exempt under the FLSA will begin receiving overtime pay based on current pay rates because they don't meet this FLSA minimum salary test.

 

But California is largely unaffected by this national news.

 

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California has a higher minimum salary threshold than the new FLSA rate. Because employers must comply with whichever law is more favorable to the employee, the FLSA changes will have little impact on California employers.

 

In California, the current minimum salary for most "white collar" exemptions (administrative, executive, professional) is $49,920 ($45,760 for employers with 25 or fewer employees). California employees who do not meet this minimum salary test cannot be classified as exempt. The lower FLSA rate does not apply to California workers because it is less favorable to the employee.

 

California's minimum salary test for exempt status is tied to the state minimum wage rate. To meet the minimum salary test, a California worker must earn two times the state minimum wage.

 

The minimum wage will rise incrementally to $15 per hour for all workers by 2023 resulting in a minimum annual salary threshold of $62,400 (two times the minimum wage) by 2023. In 2023, any worker earning less than $62,400 is non-exempt. (There are also unique California requirements for certain computer professionals and doctors. Outside sales positions have a duties test but no salary test.)

 

For a handy chart outlining minimum wage and exemption test increases in California, download CEA's Free Fact Sheet.

 

In addition, the new FLSA rule has other provisions that don't apply in California. Unlike federal law, California doesn't have a "highly compensated employee" exemption. And California doesn't allow bonuses, commissions, or incentives to be counted in order to meet the minimum salary test for exempt status. Finally, California's, duties test is far tougher than the federal duties test—a worker in California must perform decision-making responsibilities and tasks more than half of each workday to qualify as exempt. A worker must meet both a minimum salary test and a duties test to be exempt.

 

Solutions

 

If you have employees in states outside of California, now is the time to review compensation levels and make any changes to meet the new FLSA overtime requirements by January 1, 2020. Our partners at ThinkHR offer these tips to help you navigate the changing federal landscape.

 

Multi-state employers who have employees coming to California to perform work from time-to-time may want to consult legal counsel. These workers might be entitled to overtime for work done in the Golden State if they don't meet California's higher salary threshold. This is something the California Supreme Court is still reviewing so caution is warranted.