Employers do not have to pay overtime to executive, administrative and professional employees who qualify for exemption as exempt employees. Generally, exempt employees must meet both a duties test and a salary test under applicable law. The federal Fair Labor Standards Act (“FLSA”) currently has a lower salary test than California law, so California employers commonly follow the California salary test to determine if their employees will meet the salary test for exempt employees because compliance with the higher California salary requirement will comply with the salary requirement under the FLSA. However, the new federal overtime rule increases the minimum salary for exempt employees, and will soon be higher than the California minimum salary for exempt employees.
The new federal overtime rule does not change the federal duties test for exemption from overtime. It only affects the salary test. Beginning on December 1, 2016, the minimum annual salary for exempt employees under the FLSA will be $47,476, and will be adjusted automatically every three years beginning on January 1, 2020. Contrast this with the California minimum annual salary for exempt employees, which is currently $41,600. Even with California’s new State minimum wage law, California’s minimum annual salary for exempt employees is not anticipated to exceed the FLSA minimum annual salary until the State minimum wage increases to $12 per hour, which is not scheduled to occur until January 1, 2019 for employers with 26 or more employees (or January 1, 2020 for employers with 25 or fewer employees).
Employers will need to review the salaries of their exempt employees and determine whether they will meet the higher FLSA salary test for employees subject to it. For those that do not, employers will need to determine whether to increase their salaries in order to maintain their exempt status. Employers can continue to pay employees on a salary basis after December 1, even if that salary is less than $47,476, but employees with salaries below $47,476 will be nonexempt employees, and therefore, entitled to overtime. Alternatively, employers can pay formerly exempt, newly nonexempt employees on an hourly basis. Most California employers will need to pay hourly employees according to California’s minimum wage ($10 per hour, increasing to $10.50 per hour for employers with 26 or more employees on January 1, 2017), not the federal minimum wage ($7.25 per hour).