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Lawmakers in California have proposed legislation to increase the salary threshold for employees who are exempt from overtime pay to $47,476—the same threshold that was blocked last year at the federal level.
California's exempt salary threshold is calculated by doubling the minimum wage, so it increases with every minimum wage hike. Currently, businesses with 26 or more employees must:
Employers with 25 or fewer workers must:
A.B. 1565 would increase the exempt salary threshold to the greater of $3,956 per month ($47,476 annualized) or double the minimum wage, explained Michael Kalt, an attorney with Wilson Turner Kosmo in San Diego.
The proposed legislation presumably would take effect on Jan. 1, 2018, if enacted, he said. "It is presently scheduled to be heard in the Assembly's Labor and Employment Committee on April 19, so we will get an early test of its likelihood of passage."
Employers may be wondering what the reasoning is behind the proposed legislation, especially since the state's exempt salary threshold is already scheduled to exceed $47,476 for all employers by 2020.
"It is more symbolic than anything," said James McDonald Jr., an attorney with Fisher Phillips in Irvine, Calif. "California's Legislature is so opposed to the current administration in Washington that it will likely try to put back for employees whatever the federal government takes away."
[SHRM members-only HR Q&A: What is the difference between California overtime exemption requirements and federal overtime exemption requirements?]
Planned Minimum Wage Increases
The state minimum wage and exempt salary threshold are scheduled to rise incrementally over the next few years as follows for businesses with at least 26 employees (smaller employers have an extra year to comply with each increase):
In its current form, A.B. 1565 doesn't distinguish between large and small employers. If enacted, it would raise the exempt salary threshold to meet the now-blocked federal overtime rule one year before it was set to go beyond it for larger employers and two years early for smaller employers in California, Kalt explained.
New Law, Same Analysis
If the proposed legislation is approved, employers will essentially have to go through the same analysis as they did in 2016 when they thought the federal threshold would be raised, Kalt said.
"Just as when the U.S. Department of Labor proposed such an increased salary threshold, if this legislation passes employers will need to consider how to treat those employees being paid a monthly salary between the current threshold and the new $3,956 minimum," McDonald said. "If they are switched to hourly pay and they work considerable overtime, it may be less expensive simply to raise their salary to the new minimum."
He added that controls would have to be in place for employees who are paid on an hourly basis to ensure that they do not work unauthorized overtime.
"But such limits might make it difficult for them to get the job done," he said. "It will require a job-by-job analysis."
It's important to note that a higher salary threshold may not result in a raise for exempt employees who are currently earning below the proposed minimum.
"Some employers will not be able to afford paying a higher salary and may simply eliminate the position or reduce the number of positions available," McDonald said. "This in turn will limit career opportunities for those looking for entry-level management jobs."
Kalt said he thinks the bill will pass the Legislature, but Gov. Jerry Brown could veto it.
The minimum wage was just raised with a two-tier system that takes small businesses into account, he said. If this is enacted, all employers would have to reach a higher standard in less time and Brown could say that's too much, too soon, he added.
Democrats have a supermajority in both chambers of the state Legislature, so that means they could override a veto. This would be a big test to see how pro-business Democrats react, Kalt said.
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