No one ever said doing business in California –well-known as having a pro-consumer, pro-employee legislative perspective – would be easy! With some of the most stringent wage and hour employment laws in the nation, the Golden State has provided more than its fair share of challenges for small business owners over the years. Following the recent passage of Senate Bill 3, which will see the statewide minimum wage increase to $15.00 an hour for most employers by January 1, 2022, small businesses around the state have raised their collective voice and have pled for relief, asserting that the wage increase will drive down competitive balance and reduce opportunities for growth. Just over one month after the minimum wage increase was announced, the "other shoe dropped" for many business owners when the United States Department of Labor (USDOL) made its own announcement substantially increasing the federal minimum salary for the so-called "white collar" exemptions. That exasperated sigh you just heard? That comes from the collective small business population wondering when they will catch a break!

Exemption Background

Under both federal and state law, every worker is presumed to be a non-exempt employee – meaning that s/he is entitled to be paid for all hours worked, and will be paid overtime according to statutory law. Federal law provides that workers are entitled to be paid overtime for work performed in excess of forty (40) hours in a given workweek. California law provides that, in addition to the forty hour threshold, an employee is entitled to overtime payments for work performed in excess of eight (8) hours in a single workday.

Workers who are qualified as "exempt" are paid a salary, rather than an hourly wage, and are not paid overtime for work performed in excess of forty hours per week, or eight hours in a day.

In order to qualify for an exemption from the overtime laws, an employee must meet two criteria: the minimum salary threshold and the "duties" test for one of the specific categories designated as "white collar exemptions." The three most common white collar exemptions recognized under federal and state law include: executive/managerial, administrative, and professional. Each exemption carries with it a separate and distinct "duties" test, based upon the day-to-day activities of the employee. The minimum salary threshold for the white collar exemptions is identical, and was the topic for review by the USDOL.

Revisions to the Regulations

Following a directive from the Obama Administration in late 2014, the USDOL began drafting proposed changes to existing federal law, which would raise the minimum rate of pay required for certain employees to be considered "exempt" from the federal overtime requirements. In July 2015, the USDOL published its proposed changes to the minimum salary portion of the exemption test, suggesting an increase in the threshold earning requirements from $23,660.00 per year to a whopping $51,740.00 – more than double the original minimum salary. The USDOL opened a period of public comment through October 31, 2015, which resulted in over 250,000 comments pouring in from around the nation. Following the close of the public comment period, the proposed revision to the regulation changed slightly.

On May 18, 2016, the USDOL published its final ruling increasing the minimum salary threshold for the white collar exemptions to $913 per week ($47,476.00 annually). The new threshold becomes effective December 1, 2016.

As part of the accommodations made following the public comment period, the USDOL attempted to "soften the blow" of this significant rate hike by allowing non-discretionary bonuses, commissions, and other incentive payments to count toward 10% of the minimum salary requirement. Further, if the employee does not earn enough through those "incentive payments" to satisfy the minimum earning requirement, the employer may make a "catch-up" payment at the end of each calendar quarter in order to preserve the exemption. However, if the employee is not paid the required rate (in either salary alone or a combination of guaranteed payments and incentive pay) and the employer fails to make a catch-up payment, the employee would revert to a non-exempt status and would be entitled to receive overtime pay for any hours worked during the quarter where the minimum salary threshold was not satisfied.

The USDOL estimates that some 4.2 million workers will either receive substantial increases to their annual salaries to meet the increased salary requirement or become eligible for overtime as a result of the new regulations. The Department's intention is to provide a greater quality of life for the American worker by reducing their hours worked, or increasing compensation for the extra effort expended as an exempt employee.

An often overlooked, but very important factor of the new regulations requires the USDOL to re-evaluate the minimum salary threshold every three years, and to increase the salary basis to account for increases in the Consumer Price Index (CPI) over that period. In other words, in all likelihood, employers can plan on a guaranteed increase in the salary basis threshold every three years.

Effect on California Employers

The impact of the new USDOL regulations will be felt throughout the country, including here in California, which has one of the highest statewide minimum wages in the nation. Under California law, in order to qualify as an exempt, white collar employee s/he must earn no less than two times the state minimum wage. As such, as of January 1, 2016, the minimum salary threshold under California law was $41,600.00, which falls short of the new federal requirement. Even after California's statewide minimum wage rises to $10.50 on January 1, 2017, an exempt employee paid twice the state minimum wage rate would still fall nearly $4,000 short of the annual federal minimum.

Recommendations to Employers

So what should employers do now in order to prepare for the impending changes coming on December 1? First, a qualified attorney or human resources specialist should conduct a review of each exempt employee's job description to confirm that the essential job functions for the position still meet the requisite duties test for the applicable exemption. If the position meets the duties requirements, an evaluation should be done whether it is economically feasible to increase the employee's salary to meet the new $47,476 annual salary requirement, or whether it makes more sense to re-classify the employee as "non-exempt" moving forward.

It bears noting that if an employee's status is changed from exempt to non-exempt, expectations regarding work hours, overtime, and breaks should be clarified early, and reiterated often. Newly designated non-exempt employees should also be provided with a copy of any written policies or procedures regarding overtime (i.e., if a supervisor needs to approve overtime in advance and/or if unapproved overtime can be grounds for discipline).

Employers should also remember that every non-exempt employee is required to maintain a written record of their actual time worked. This includes a "punch" for the beginning of every shift, beginning and end of each meal period, and the end of each shift. Inaccurate time records, "short" meal periods, and unpaid overtime have been some of the most prevalent claims in a recent barrage of class action and multiple plaintiff actions filed throughout California courts.

Employers should also prepare for California to update its own statutory exemption requirements to either mirror or surpass the federal requirements.

With these revisions to the exemption requirements, small businesses nationwide are now sharing in the pain that California employers have known for years … but at least we have sunshine and great beaches!

Brian Koegle is a partner with Poole Shaffery , a full-service business and employment law firm, providing counseling and litigation services to businesses across California. Nothing contained herein is intended to provide legal advice.