Increase to Exempt Employee Minimum Salary
How will the new federal exempt employee salary requirements impact California employers?
IntroductionToday President Obama and Secretary Perez announced the publication of the Department of Labor's final rule updating the overtime regulations, which will automatically extend overtime pay protections to over 4 million workers within the first year of implementation. This long-awaited update will require HR and payroll personnel to review the whether employees earning less the the new minimum salary should receive a boost in pay or be re-categorized to non-exempt status.
Key Provisions of the Final RuleThe Final Rule focuses primarily on updating the salary basis for executive, administrative and professional workers to be exempt, as well as outside sales and computer employees. Specifically, the Final Rule: 1. Sets the standard salary level at the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region, currently the South ($913 per week; $47,476 annually for a full-year worker); 2. 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 ($134,004); and 3. 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. Additionally, the Final Rule amends the salary basis test to allow employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new standard salary level. The initial increases to the standard salary level and HCE total annual compensation requirement will be effective on December 1, 2016. Future automatic updates to those thresholds will occur every three years, beginning on January 1, 2020.
What Does This Mean For You?Previously, California's compensation requirements were higher than the federal requirement. Now that the federal requirement surpasses the $41,600 California minimum, employers must make a decision. Either increase exempt employee salaries to $47,476 or re-categorize the employee to non-exempt. Because employers can count up to $4,747 in non-discretionary bonuses and incentive payments toward the salary requirement, make sure to include these amounts in your analysis. Employers have until December 1, 2016 to re-classify any employees who will not earn enough to remain exempt. This change impacts many areas of an exempt employee's work. Evaluate how to communicate the new guidelines, such as recording hours worked, rest and meal periods, overtime expectations, working off-the-clock, company-provided laptops and off-site access to e-mail and working from home. Because employees who are reclassified may not have had to consider some of these issues previously, it is important to clearly inform them of the policies that will be applicable to them.