California’s Exempt Salary Threshold Will Rise Regardless of Blocked Overtime Rule

Organizations still have to comply with increases to the state salary threshold

Lisa Nagele-Piazza, J.D., SHRM-SCP By Lisa Nagele-Piazza, J.D., SHRM-SCP December 15, 2016

California's exempt salary threshold will rise along with the state's minimum wage regardless of what happens to the now-blocked federal overtime rule. But employers in the state will still need to stay informed about movements at the federal level.

One of the biggest challenges for California employers is complying with ever-changing workplace rules, said Michelle Lee Flores, an attorney with Cozen O'Connor in Los Angeles.

The injunction on the federal overtime rule adds another layer of complexity for employers as they struggle to comply with updated regulations on both the federal and state level, she said.

California employers have had the luxury of ignoring the federal Fair Labor Standards Act (FLSA) for a long time, said Robert Jones, an attorney with Ogletree Deakins in San Francisco. But they now have to keep an eye on what's happening with the federal overtime rule because it was set to exceed the state threshold—at least for the next few years.

Federal Rule

The salary threshold for the FLSA's overtime exemption would have increased to $47,476 from $23,660 on Dec. 1. And employers had the option of raising salaries for exempt employees above the threshold or reclassifying employees to nonexempt.

However, a federal judge temporarily prevented the rule from taking effect while litigation ensues over the U.S. Department of Labor's (DOL's) authority to double the salary level.

It remains unclear whether the rule will be restored or permanently halted.

The DOL has appealed the injunction, and the 5th U.S. Circuit Court of Appeals has agreed to expedite the case. But no one really knows what's going to happen with respect to the appeal, Jones said.

Some employers have opted to wait and see what happens to the federal rule before reclassifying employees or raising their salaries. Those employers should keep track of the hours worked by the potentially affected employees, pending a final decision on the federal rule, Jones said.

He noted, however, that many employers have already made changes to comply with the federal rule.

The federal increase wasn't as significant for California employers because the state already has a much higher threshold. And a state increase scheduled for Jan. 1, 2017, would further close the gap.

State Increases

Employers in California need to know that the state minimum wage impacts the minimum salary threshold for exempt employees, Flores explained.

Under California law, the salary threshold is twice the minimum wage. Specifically, exempt employees must earn a fixed monthly salary of at least double the minimum wage for full-time employment. The current salary threshold is $3,466.67 a month ($41,600 annualized) based on the $10-per-hour state minimum wage.

[SHRM members-only HR Q&A: What is the difference between California overtime exemption requirements and federal overtime exemption requirements?]

California employers should note that the state minimum wage is scheduled to increase in phases between 2017 and 2022. So that means the minimum exempt salary will also rise each year as follows (for businesses with at least 26 employees):

Year Minimum
Businesses with 25 or fewer employees will have an extra year to comply with each increase.

Flores noted that some cities and counties in California have their own, higher minimum wage that impacts nonexempt hourly rates and overtime payments, but the exempt salary threshold is based on the state minimum wage.

Regular Audits

Flores said employers should set a calendar reminder each year for September to start thinking about the changes that will take effect the following January.

Have a list of exempt employees and determine if any of their salaries will need to be adjusted for the upcoming year, she said. Start crunching those numbers and set up a timeline to roll out any changes before the effective date.

She noted that exempt employees in California must also be "primarily engaged" in certain exempt activities more than 50 percent of the time.

This is a quantitative duties test, as compared to the FLSA's qualitative test.

"Someone performing exempt duties this year may not be performing exempt duties next year simply because of changes in business," she said. So employers need to take a look at the duties test, too.

"The biggest key is to be organized in the way you look at it—it's a step-by-step approach," she added. "Know your wage order, know who your exempt folks are and keep up with changes—while keeping in mind there may be midyear changes, too."


Employers have been asking whether the federal overtime rule—if revived—could be applied retroactively to the original Dec. 1 effective date. 

"It's a long shot that the DOL would enforce the rule retroactively," Jones said, "but if it did, the burden would be on employers to show the hours employees worked."

There are specific rules in California about how work hours must be tracked for nonexempt employees, he explained. Employers have to record when nonexempt employees start and stop work and when they start and stop their meal breaks.

Those times should be recorded for any employees with questionable classifications pending any action by the court or by Congress on the federal rule.

For financial purposes, employers may consider recording the planned increases and "tucking away those funds for a rainy day," Flores suggested.  "If the federal rule is applied retroactively, it will still be a hit but won't be so noticeable. If it isn't, the funds are there for something else."

For now, employers should comply with California's changes and wait and see what happens at the federal level, she added.

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