Employment Law Alert: Increased California Pay Requirements Effective January 1, 2025

A variety of exempt and non-exempt minimum pay standards in California will increase on January 1, 2025.

Exempt Software Professionals

In order to treat software professionals as exempt from overtime, California employers generally need to meet the requirements of the “computer software professional” exemption. The term “software professionals” covers positions such as software engineers, programmers, developers, analysts, and others eligible to be classified as exempt based upon their software-development-related work. This exemption has had a special, heightened minimum salary requirement for the last several years.

The California Department of Industrial Relations has announced that the minimum pay requirements for exempt computer software professionals will increase effective January 1, 2025, based upon an increase in the California Consumer Price Index. Effective January 1, 2025, the minimum salary for an exempt computer software professional will increase from $115,763.35 to $118,657.43 per year (from $9,646.96 to $9,888.13 per month). California’s computer software professional exemption is one of the few overtime exemptions that also permits exempt status with pay on an hourly basis. Also effective January 1, 2025, California is raising the minimum hourly rate for exempt computer software professionals from $55.58 to $56.97.

Importantly, employers must satisfy not only the pay requirements, but also strict tests regarding the employee’s duties in order to classify employees as exempt computer software professionals. For example, regardless of pay level, the exemption does not apply to entry-level software professionals, or to an employee who has “not attained the level of skill and expertise necessary to work independently and without close supervision.” The consequences of failure to satisfy either the compensation or duties requirement for exempt status are substantial: the positions affected would be deemed non-exempt, and the employer would be liable for overtime back pay for up to four years (and other amounts).

Minimum Wage Increases (Non-Exempt Employees)

Effective January 1, 2025, California’s minimum wage (applicable to non-exempt employees) will increase to $16.50 per hour for all employers. It appears that Proposition 32 will not pass, although should that change, this would have the effect of increasing the minimum wage further. Numerous cities throughout California have also enacted ordinances with increasing minimum wages in 2025. Employers should check with counsel to confirm pay requirements in all locations where employees work.

Minimum Salary for “White Collar” Exemptions

Based upon the increase to the California minimum wage, the minimum annualized salary for exempt “white collar” employees (i.e., those covered by the administrative, executive, and/or professional exemptions) as of January 1, 2025 will increase to $68,640 for all employers. It appears that Proposition 32 will not pass, although should that change, this would have the effect of increasing the minimum salary for exempt “white collar” employees further.  This minimum salary is set at two times the California state minimum wage for full-time employment. As noted above, there is a special (and much higher) minimum salary requirement for exempt computer software professionals. In addition to the minimum salary requirement for the “white collar” exemptions, strict job duties tests must also be satisfied. In our experience, employers make by far more misclassification mistakes due to misapplication of the job duties tests.

Minimum Salary Under FLSA

On November 15, 2024, a federal district court in Texas vacated the U.S. Department of Labor’s final rule which increased the minimum salary for “white collar” exemptions in July 2024 under federal law, and was going to once again increase the minimum salary on January 1, 2025. Consequently, the minimum salary for “white collar” exemptions under federal law is reset to the original threshold of $684 per week (or $35,568 annually). The possibility remains that an appellate court could reinstate the increased federal salary requirements at some point in the future. Note that multiple states, like California, have a higher minimum salary necessary to meet the threshold for exempt employees. Moreover, in addition to the salary test, federal law also requires employers to satisfy a job duties test.

Recommendations

We recommend that employers regularly review their wage practices to ensure legal compliance. We believe it is particularly important for employers to work with legal counsel to confirm the propriety of “exempt” status classifications, and classification of workers as “contractors,” to avoid common compliance mistakes with respect to such classifications.

Employers seeking further guidance may contact any of the firm’s attorneys.