The following is a guest blog post by Richard J. Simmons of Sheppard Mullin in Los Angeles. He represents employers in various labor and employment matters.
The U.S. Department of Labor (DOL) has proposed a new salary standard for exempt employees under the federal wage and hour law. But it falls below California’s standard.
Under the Fair Labor Standards Act of 1938 (FLSA), the minimum salary that employees must receive to qualify under the executive, administrative, or professional exemption is currently $455/week. In 2016, the DOL adopted a rule radically increasing the sum to $913/week. But before that rule was scheduled to take effect, it was blocked by a federal district court in Texas.
Under the Trump Administration, the DOL announced in 2017 that it would reevaluate the topic. On March 7, 2019 the DOL proposed to increase the minimum salary level to $679/week. The DOL’s notice focused primarily on updating the salary and compensation levels needed for workers to be exempt under the FLSA. If finalized, the proposal will include:
- Salary Level Increase: Increasing the standard salary level from $455 to $679/week (the equivalent of $35,308 annually);
- Highly Compensated Employee (HCE) Increase: Increasing the total annual compensation requirement needed to exempt HCEs from the current level of $100,000 to $147,414 per year; and
- Nondiscretionary Bonuses: Allowing employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the standard salary level if these payments are made on an annual or more frequent basis.
But these proposed changes don’t impact California employers, because they must observe the stricter state rules already in effect. Specifically, employees must be paid at least $960/week (80 times the state minimum wage) to qualify under the California executive, administrative, and professional exemptions. This equates to $49,920 a year. Consequently, even if the DOL’s proposal becomes final, the federal standard would remain considerably below the California test.
It’s also noteworthy that California doesn’t provide an exemption for HCEs; thus, the payment of a $100,000 salary doesn’t qualify an employee as exempt if the other hallmarks of exempt status aren’t met.
Employers should understand that a determination of whether an employee qualifies as exempt under the state and federal laws isn’t based solely on an employee’s salary. It generally requires an intense, fact-specific analysis. As the DOL has pointed out in a new fact sheet, the DOL regulations generally require that employers satisfy each of three tests for one of the FLSA’s white collar exemptions to apply:
- Salary Basis Test: The employee must be paid a predetermined and fixed salary that isn’t subject to reduction because of variations in the quality or quantity of work performed;
- Salary Level Test: The amount of salary paid must meet a minimum specified amount; and
- Duties Test: The employee’s job duties must primarily involve executive, administrative, or professional duties.
The California and federal standards differ materially. For example, apart from the differences in the current state and federal salary level tests ($455 vs. $960 per week) that wouldn’t be eliminated by the DOL’s March 2019 proposal, significant differences exist in relation to the duties tests.
Some of the differences are extremely subtle and difficult to identify.For example, the FLSA uses a primary duties test while California law focuses on whether an employee is primarily engaged in exempt activities. Based on this subtle difference in language, the California Supreme Court concluded that the federal law uses a qualitative standard while California applies a quantitative test.
The state and federal exemptions are discussed in detail in the 2019 edition of the Wage and Hour Manual for California Employers, which will now be available through the new CEB and Simmons Employment Law Library. This new library features invaluable best practices, commentary, practice advice, sample documents, and more.
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