On September 5, 2017, the U.S. Department of Justice dropped its defense of a controversial Obama-era overtime exemption rule, just days after a federal judge in Texas issued a nationwide permanent injunction blocking enforcement of the rule.
The rule, which was issued by the U.S. Department of Labor in 2016, would have increased the minimum salary employees must receive to qualify as exempt from $23,660 to $47,476 annually. The rule would have affected an estimated 4.2 million workers, and would have dramatically increased labor costs for employers. By dropping its defense, President Trump’s DOJ effectively killed the rule, dealing a major victory to employers throughout the country.
However, California employers should not start celebrating. In California, employees do not qualify for the executive, administrative and professional overtime exemptions unless they spend more than 50 percent of their time performing exempt duties and earn a monthly salary equivalent to twice the state minimum wage for full-time employment (40 hours a week), which is $43,680 per year based on the current minimum wage of $10.50 per hour for employers with at least 26 employees. When the minimum wage increases to $11.00 per hour on January 1, 2018, the minimum salary requirement will increase to $45,760 per year. Scheduled increases to the state minimum wage will further increase the minimum salary requirement through 2022.
As if that were not enough, the California State Legislature is attempting to make up for the failed federal overtime exemption rule with Assembly Bill 1565, which would increase California’s minimum salary for exempt employees to $47,472 per year effective January 1, 2018, a year earlier than currently scheduled. AB 1565 has already passed in the California State Assembly, and it would be foolish to bet against the California State Senate passing it or Governor Jerry Brown signing it into law.
Unlike California’s minimum wage law, AB 1565 does not distinguish between small and large businesses. Thus, if enacted into law in its current form, AB 1565 will have the biggest impact on businesses with 25 or fewer employees, as the minimum exempt salary for these small businesses was not set to exceed $45,760 until 2020.
What Employers Should Do
Employers should review positions they have designated as exempt and determine whether they are properly classified. Make sure exempt employees are paid a salary, as opposed to an hourly wage, which is equivalent to twice the minimum wage for full-time employment. Also confirm that at least 50 percent of duties actually performed by an employee are exempt duties by carefully analyzing the practical realities of the job, instead of relying upon potentially outdated and inaccurate job descriptions. If AB 1565 is enacted into law, consider whether any employees should have their compensation increased or be reclassified as nonexempt. To avoid costly misclassification claims, consider consulting employment counsel to conduct an overtime exemption analysis.