As a result of a new law, California’s minimum wage will start increasing each year. This will change not only the floor amount affected employers must pay employees, but also which employees will be considered “exempt” from overtime pay requirements. Misclassifying employees as exempt can result in substantial legal liability for an employer, which is why keeping a close eye on the changes created by the minimum wage increases is important.

Public employers will be less impacted by these changes than private sector employers will be. But as described below, there will be an effect on the public sector as well.

California’s steadily increasing minimum wage

On April 4, 2016, Governor Brown signed Senate Bill (“SB”) 3, which increases California’s minimum wage each year so that it will reach $15 per hour in 2022 (unless the increases are temporarily delayed at any point due to certain economic conditions).

Currently, California’s minimum wage is $10/hour. The new law will increase this amount as follows for employers who employ 26 or more employees:

  1. On January 1, 2017, the minimum wage will increase to $10.50 per hour.
  2. On January 1, 2018, the minimum wage will increase to $11 per hour.
  3. On January 1, 2019, the minimum wage will increase to $12 per hour.
  4. On January 1, 2020, the minimum wage will increase to $13 per hour.
  5. On January 1, 2021, the minimum wage will increase to $14 per hour.
  6. On January 1, 2022, the minimum wage will increase to $15 per hour.

There is a delay in implementations for small businesses. Specifically, the above schedule is delayed at each step by one year for employers with 25 or fewer employees. Commentators have observed that under the schedule set by SB 3, California will soon have the highest minimum wage in the country.

Public employers and California’s minimum wage

Private employers clearly must comply with the new minimum wage requirements, but for public employers the issue is more complicated.

By way of background, in general, public employers in California, including cities, counties, special districts, and community college and K-12 school districts, are not subject to state wage and hour law. Instead, generally, such employers need look only to the federal Fair Labor Standards Act (“FLSA”) and, for educational institutions, the Education Code, for guidance on wage and hour laws, such as payment of overtime and meal and rest breaks.

The state minimum wage is an exception, and unfortunately a complicated one. As described below, the minimum wage applies to some agencies but not others, and for some types of agencies there is not yet case authority on whether it applies. As a threshold matter, the Industrial Welfare Commission wage orders apply overtime, meal and rest break, minimum wage, and other rules on California employers, but have provisions expressly exempting public agencies from many requirements. The exemption does not, however, list minimum wage as one of these requirements. This has not settled the matter because there is a school of thought that the IWC does not have the legal ability to impose a minimum wage on many public sector agencies.

From this point of uncertainty, the law is as follows. For counties and by extension charter cities, the state minimum wage should not even be an issue, because those entities already are free from compliance with such employment laws because of their exclusive rights under the state constitution to set compensation for their own employees. The relevant cases on this point, which explain this unique right, are Curcini v. County of Alameda and Dimon v. County of Los Angeles, both from 2008. These agencies (counties and charter cities) must abide by the federal minimum wage, which is currently $7.25 per hour.

Next, K-12 school districts must comply with state minimum wage law. This is because a Court of Appeal decision from 2010, Sheppard v. North Orange County Regional Occupational Program, has considered whether the IWC could impose a minimum wage on the public sector and held that it could for a K-12 school district.

What about other agencies like general law cities? No published case has issued yet applying the minimum wage to such agencies, although those agencies are well advised to take into account whether the reasoning of Sheppard will extend outside the K-12 context to their type of agency. Counsel should be consulted in making the determination and considering the level of risk involved.

Effect on Exempt Status

For private employers, the new schedule for minimum wages increases will have a substantial effect on which employees are exempt from overtime requirements. Private employers must follow both state and federal law governing overtime and exempt status, with state law almost always being the paramount concern because it is more favorable to employees. For most state law overtime exemptions – for example, executive, administrative, and professional – the salary basis threshold is tied to the state minimum wage. An employee must make more than “two (2) times the state minimum wage for full-time employment” to qualify for the exemption. “Full-time employment” is defined as 40 hours per week. At $10 per hour, currently this corresponds to $41,600 per year, or $3,466.67 per month. Under SB 3, however, this level is going to rise each year, because the minimum wage is rising. Employees whose pay is surpassed by these thresholds will no longer be considered exempt, and an employer who ignores these increases could face substantial civil liability for misclassification of employees. This could include potentially liability for unpaid overtime and accompanying penalties, as well as attorneys’ fees if a lawsuit is brought.

Within the private sector, the new thresholds will have significant effect for private educators. There is an overtime exemption for teachers in the California wage orders and also an exemption for teachers (specially designed for private schools) set forth in California Labor Code section 515.8. But both exemptions have the traditional salary basis test of twice the state minimum wage for full-time employment. In figuring out how to pay teachers, a private school may currently have to struggle to offer a beginning teacher $41,600 per year, or $3,466.67 per month, to help insure exempt status. But SB 3 means the school will have to renew that struggle each year as the salary basis thresholds increase.

In the public sector, overtime exemptions will not be affected by the state minimum wage increases. For public agencies, the federal FLSA governs payment of overtime, and also who is exempt from overtime requirements, e.g., executive, administrative, and professional employees. (Again, there is the caveat that public educators should check policies under the state Education Code, and determine if they will affect exemption analysis.) Under the FLSA, there is a “salary basis” test for many exemptions, requiring exempt employees to have a certain higher level of pay. But that test is not connected to any state minimum wage. Thus, the California minimum wage increases will not affect the “salary basis” thresholds for the FLSA.

As a matter of federal law, the Department of Labor in Washington D.C. is actually expected this spring to announce separate increases to the federal exemption salary basis thresholds themselves. Our firm will report on those in a separate blog post or bulletin.

A final complexity – Deceleration of the Schedule

SB 3 allows deviations from the established schedule of minimum wages increases, based on economic conditions. The primary possible changes are a potential “off-ramps” if and when the economy performs poorly in the next several years. Under SB 3, on or before July 28 of each year, the state Director of Finance is required annually to determine, based on certain factors, whether economic conditions can support the scheduled minimum wage increase and to certify that determination to the Governor and the Legislature. SB 3 also requires the State Board of Equalization to publish specified retail sales and use tax information on its Internet Web site to be used by the Director of Finance in making that determination.

Conclusion

Advance planning will help employers – both public and private sector – to comply with the new minimum wage thresholds. In addition, conducting wage and hour audits of the workforce at this time, either using an independent consultant or legal counsel, will help in this effort.