On May 18, the Department of Labor (DOL) making changes to Part 541 governing overtime exemptions under the Fair Labor Standards Act (FLSA). This means that, for the first time in many years, California employers must pay attention to the U.S. DOL’s changes and comply with overtime rules at both the federal and state levels. You should be reviewing your exempt employee's pay now so you can make informed decisions by December 1.
Here are the key elements of the new regulation that you need to know now:
- Federal Salary Threshold Now Exceeds the California Threshold
The U.S. DOL set a new threshold at $47,476 a year ($3957/month, $913/week, or $22.83/hour), higher than California’s current threshold, which is double the current state minimum wage. Since California’s minimum wage rose to $10 per hour in January of this year, the state’s overtime salary threshold has jumped to $41,600 a year. Because the federal level is higher, California employers will need to follow it to determine which employees are eligible for overtime pay. The increase in the salary threshold will also result in employees that are currently exempt in California being reclassified as non-exempt.
- Federal Rule’s Automatic Increases Mean that California Employers Will Need to Remain Aware of Both the Federal and State Thresholds to Ensure Compliance
The threshold will be adjusted every 3 years to maintain the level at the 40th percentile of full-time salaried workers in the lowest-wage Census region.
- Federal Rule Did Not Change Duties Test but California Employers Must Continue to Follow the State’s 51% Rule
California employers will need to continue to apply the duties test when categorizing employees. In addition to satisfying the salary threshold, executive employees in California must engage in exempt tasks at least 51% of the time that they work in order to be classified as exempt.
- California Employers Remain Subject to California’s Law When More Favorable to Employees
While federal policy only allows overtime pay based on a 40-hour work week, California employers must continue to comply with the state’s 8-hour workday restriction which allows eligible employees to claim overtime based on an 8-hour workday.
- California Employers are Unaffected by “HCE” (no HCE definition in CA)
Raise the highly compensated employee (“HCE”) threshold from $100,000 to $134,004. The employee must customarily and regularly perform at least one of the exempt duties of an exempt employee.
- Automatically Increases
Every three years (1) the minimum salary level to the 40th percentile of full-time salaried workers in the lowest income region of the country; and (2) the HCE threshold to the 90th percentile of full-time salaried workers nationally.
- Incentive Compensation
The final rule also allows for up to 10 percent of the minimum salary level for non-HCE employees to be met by non-discretionary bonuses, incentives, or commissions, if these payments are made on at least a quarterly basis.
- Effective Date is December 1, 2016
With the rule going into effect on December 1, 2016, employers should review their current workforce immediately to determine which employees are affected, whether to re-classify those employees, and execute a communications strategy. Employers should also keep in mind the periodic adjustments and set a regular review process.