On May 18th, 2016, the U.S. Department of Labor unveiled its Final Rule to update regulations governing the exemption of executive, administrative, and professional (EAP) employees from the minimum wage and overtime pay protections of the Fair Labor Standards Act (FLSA or Act). Along with several key provisions in the new rule, the most important for California employers is the new minimum salary threshold for these exempt employees.
According to the FLSA, one of the main benefits of classifying employees as exempt is to avoid tracking their hours or pay them overtime, no matter how many works they work. However, starting December 1, 2016, federal law will require employees earning at least $47,476 annually ($913 per week) to qualify for these exemptions, as opposed to the previous federal minimum of $23,600 ($455 per week).
Under California law, employers are currently required to pay exempt employees a salary equal to no less than twice the state minimum, which translates to $41,600 annually. However, state laws can only offer employees more protection than federal laws and not less. Since the state minimum salary for exempt employees will now be lower than the federal minimum, employers in California must pay its exempt employees the federal standard in order to continue classifying employees as exempt.
The key provisions of the Final Rule include the following:
- Sets the standard salary level at the 40th percentile of earnings of full-timed salaried employees in the lowest-wage Census Region, currently the South, which $47,476 annually or $913 per week for a full-year worker;
- Sets the total annual compensation requirement for highly compensated employees (HCE) subject to a minimal duties test to the annual equivalent of the 90th percentile of full-time salaried workers nationally, which is $134,004; and
- Establishes a mechanism for automatically updating the salary and compensation levels every three years to maintain the levels at the above percentiles and to ensure that they continue to provide useful and effective tests for exemption.
In addition, the Final Rule amends the salary basis tests to allow employers to use nondiscretionary bonuses and incentive payments (such as commissions) to satisfy up to 10 percent of the new standard salary level. However, no charges are made to the duties tests.