California's Overtime Rules May Supersede Federal Law

​California's law on overtime pay differs substantially from the proposed rule on overtime pay recently issued by the U.S. Department of Labor, so employers will need to pay close attention to the details of both to remain in compliance.

It's important to understand that federal law does not pre-empt state law on overtime pay. "This means that the most employee-favorable law, whether arising under state or federal law, will apply," said John Skousen, an attorney with Fisher Phillips in Irvine, Calif., and Dallas.

Complexities in Calculating Overtime Pay

The federal Fair Labor Standards Act (FLSA) simply requires employers to pay one-and-a-half times the regular rate of pay for all hours worked over 40 hours in a workweek.

In California, overtime must be paid at one-and-a-half times the regular pay rate for hours worked over eight in a workday or over 40 in a workweek. In addition, California employers must pay overtime at double the regular pay rate for hours worked beyond 12 hours in one day and for all hours worked beyond eight hours on the seventh consecutive day of work in one workweek.

Employers also need to ensure that they apply overtime exemptions properly.

Under the DOL proposal, the annual salary threshold to qualify for a white-collar exemption would increase from $35,568 to $55,068. The salary threshold to qualify for a highly compensated employee exemption would increase from $107,432 to $143,988.

The overtime threshold in California is twice the state minimum wage of $15.50 per hour. So in 2023, the minimum salary for exempt employees in the state is $64,480, according to the California Department of Industrial Relations (DIR). California does not recognize the highly compensated employee exemption.

"Because the California salary test is based on twice the minimum wage for a 40-hour week, it increases each time the minimum wage is increased," said John Battenfeld, an attorney with Morgan Lewis in Los Angeles.

Employers "should be meticulous about understanding each exemption's nuances, rather than presuming all exempt statuses function the same way," said Scott Ruygrok, an attorney with Jackson Lewis in Irvine, Calif.

Different Rules for Duties Test

Under the FLSA, white-collar exemptions can apply to executive, administrative, professional, outside sales and certain computer-related positions. The worker must be paid on a salary basis, and the worker's primary job duties must satisfy the legal requirements for an exemption under the corresponding job category.

For an executive, that means their primary duty must be managing the enterprise or a department or subdivision of the enterprise, and they must customarily and regularly direct the work of at least two employees and have the authority to hire or fire workers. For administrative positions, the employee's primary duty must be performing office or nonmanual work that is directly related to the employer's general business operations, and they must exercise discretion and independent judgment with respect to matters of significance.

"While the duties tests for federal and California law are similar, there are key differences. Under federal law, an exempt employee must be primarily engaged in exempt duties. In contrast, California mandates that an exempt employee spend over half their working time on such exempt duties. This numeric threshold is often more difficult to meet," Ruygrok said.

HR professionals in California should regularly review the job duties of exempt employees, ensuring that these individuals dedicate more than half their work time to tasks that qualify them as exempt, he added.

To qualify for the highly compensated employee exemption under the FLSA, the employee's primary duties must include performing office or nonmanual work, and they must customarily and regularly perform at least one of the exempt duties of an exempt executive, administrative or professional employee.

"Exemption compliance is an ongoing process, as duties and roles may change over time," said Russell Bruch, an attorney with Morgan Lewis in Washington, D.C. "Strong supporting documentation will help mitigate risk if an exemption classification is ever challenged. Job descriptions should contain accurate descriptions of the employee's actual duties and be aligned with the particular exemption sought." 

Under federal law, companies can fire or discipline workers for refusing to work overtime, as long as there's not a discriminatory reason for the decision.

Likewise, a California employer can discipline or fire an employee for refusing to work scheduled overtime. However, it cannot discipline or fire someone for refusing to work on the seventh day in a workweek, and it may be subject to a penalty for causing an employee to forgo a day of rest, according to the DIR.

Under state and federal law, employers must pay overtime whether the overtime hours were authorized or not. What counts is the hours the worker was "suffered or permitted to work," which means work the employer knew or should have known about, the DIR stated. However, employers can discipline employees who violate the employer's policy of working overtime without the required authorization, the department said.