Exempt Classification Mix & Match: New Considerations in Federal and State Rules

November 9, 2016 6:47 pm

Exempt Classification Mix & Match: New Considerations in Federal and State Rules

Just when you thought being an employer in California couldn’t get any trickier, the updated federal rule for exempt employees is about to throw you for a loop. Effective December 1, 2016, the minimum salary for an Executive, Administrative or Professional employee will be $47,476 per year for the person to meet the salary test of an exempt employee under the Fair Labor Standards Act (FLSA).

exempt classification

Through the year 2019, this creates one of the rare circumstances when federal law is more generous than that of California. But the comparison of federal vs. state doesn’t end there! You probably know that when laws conflict, an employer must implement the option that is most generous to the employee. Below are additional differences in federal and California overtime rules that you’ll need to consider:

• The federal salary test may be higher, but California’s duties tests for Executive, Administrative and Professional exemptions will still be more protective of employees. (You may refer to the DLSE Glossary  for helpful definitions of these exemptions.) Employees will need to meet each applicable test to be correctly classified as exempt.

• The FLSA does not require a salary test for employees classified as Inside Commissioned Sales, Computer Professionals, and Licensed Teachers, Lawyers, and Doctors. However, California requires these employees to meet both a salary and duties test to be exempt. (In this case, you would follow California salary requirements, not federal.)

• The federal law allows nondiscretionary bonuses and commissions to be included when calculating total salary, but California law does not.

• Federal law provides an exemption for “highly compensated employees” based on a minimal duties test, but California law does not.

• California’s minimum wage will increase annually between 2017 and 2023, with a one-year delay for employers of 25 or fewer employees. When it reaches $15 per hour, the minimum salary for an exempt employee will be $62,400 annually. Due to the difference in timing for smaller employers, in 2019, your employee count will determine whether you’ll need to follow the federal or state salary threshold.

• The Department of Labor will adjust the federal minimum salary every three years beginning in 2020, so California employers will need to keep a close eye on both the state and federal rules to know which is higher.

This back-and-forth can certainly feel daunting, but you can manage your employee classifications by looking at requirements one step at a time.

1. Identify all employees in your organization who are currently paid on a salary basis.

2. Carefully review each employee’s responsibilities to be sure they meet the applicable duties test imposed by California law, remembering that the employee must spend more than 50% of his/her time on exempt-level duties in order to meet exempt requirements. Regardless of salary, if the job does not meet this high standard, the employee should not be considered exempt.

3. Identify any salaried employee whose pay is less than $913 per week ($47,476 annually.) You will need to decide whether to increase the salary or reclassify the person as non-exempt.

4. Any employee who will be reclassified as non-exempt should be trained in proper time-keeping practices, including prohibitions on working “off the clock,” and the importance of taking rest and meal periods.

5. Make a plan to repeat these steps each year with an eye on the changes in both state and federal rules.

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