Employment Law Alert: Federal Law Increases Minimum Exempt Pay Effective December 1, 2016

The United States Department of Labor issued a Final Rule to update overtime regulations regarding the minimum weekly salary required for exempt executive, administrative, professional, and salaried computer professional employees.  Under the new regulations, effective December 1, 2016, the minimum weekly salary for such exempt employees will rise from $455 to $913 per week (an annualized increase from $23,660 to $47,476).

The Final Rule includes a mechanism to automatically update the minimum salary level every three years.   Employers can use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new federal salary level, provided they are paid on a quarterly or more frequent basis.  Importantly, however, California law does not permit employers to use nondiscretionary bonus/incentive payments to satisfy California exempt salary requirements.

Currently, California’s minimum annual salary for exempt executive, administrative, and professional employees is $41,600 – two times the minimum wage for full-time employment.  Since employers must meet both federal and state wage and hour requirements in order for employees to qualify for overtime exemptions, as of December 1, 2016, employers in California must meet the higher federal $47,476 annual salary level for the executive, administrative and professional exemptions.

The current minimum salary for exempt computer software professionals in California is $87,185.14 annually, or $41.85 hourly.  California employers must continue to comply with these higher pay requirements.

The Final Rule also increased the minimum annual compensation for the federal highly compensated employee exemption from $100,000 to $134,004 (which must include a guaranteed weekly salary of at least $913 per week).  While federal law imposes a relaxed exempt duties test for highly compensated employees, California law does not incorporate any relaxed duties test for highly compensated employees.  In other words, in addition to meeting exempt pay requirements, California employers must also satisfy the same strict exempt job duties tests regardless of high pay level.

The new federal regulations do not alter job duty requirements for exempt status.  In our experience, by far more exempt classification mistakes are based upon misunderstanding which job duties qualify for exempt status.   While federal law requires that an employee’s “primary duty” be exempt, California law follows the more strict “primarily engaged in” test — which requires the employer to show that the the employee spends over half of his or her time every work week engaged in duties qualifying for an exemption from overtime.

Employers should review salary levels of exempt employees to ensure that they meet both federal and state requirements.  We also recommend that employers periodically audit the duties exempt employees perform to ensure they qualify for an overtime exemption.