Breaking news - the new overtime regulations that were to go into effect on December 1, 2016 have been put on hold. The ruling increases the minimum salary threshold for employees exempt under the federal Executive, Administrative and Professional exemptions from its current threshold of $455 per week to $913 per week (annualized to $47,476 per year), with subsequent adjustments to be made every three years.
However, a preliminary injunction is just a temporary hold. While the Final Rule will not take effect on December 1 as planned, it may or may not become effective at a later date. The Court now has a chance to review the merits of the case and issue a final decision without the Final Rule taking effect in the meantime.
This case was filed in Texas, does it apply to my organization in California or any state?
Yes, the Court issued a nationwide injunction. California’s current minimum salary threshold DOES still apply. It is substantially higher than the federal level. It is currently $41,600. January 1st, 2017 it will rise to $43,680 (as it is tied to minimum wage which rises to $10.50 for California employers with 26 or more employees).
What should we do now?
Employers can continue with the status quo as to classifying workers as exempt under federal law because the new minimum salary will not be effective on 12/1 as originally planned.
If you have already made plans to meet the new salary threshold of $913, you must decide whether to commit to such changes or reverse course. But keep in mind that the preliminary injunction is temporary, and employers may be required to make such changes again in the future.
If you have already communicated salary increases to maintain exemption status, there can be employee relations issues associated with a decision to rescind them, so employers need to consider this in the analysis.
Aside from the new (on hold) threshold we wanted to provide some guidelines to help you examine if an employee is exempt or not.
There are some simple and not so simple considerations to ensure you are compliant which we have summarized in this article and provided some helpful references for you. Most important we want you to be aware that the potential risk of not complying or properly classifying employees could lead to fines and/or expensive class action lawsuits. These fines can add up at $100 per pay period, per employee, per violation, plus attorney fees. Under PAGA an initiating employee is also motivated by a 25% commission on all fees and damages awarded.
The simple solution:
Assuming the ruling is not overturned, move former exempt employees paid under $47,476/year to an hourly basis. If you have not operated with time cards in the past, make sure you get advice from your HR or payroll provider to get this right. Keep in mind that lunch and break requirements will take effect for most employees.
The less simple solution, with caution:
Increase exempt employee salaries up to cover the threshold. Key issues to consider include:
· The impact on salary compression. Those employees that are already paid more may not be happy about lower paid folks getting raises and/or now making the same as them. You might need to shift your whole pay scale upwards to accommodate this or risk morale impact.
· Are they really exempt? This is the potential fines or class action lawsuit question.
Before you rush to examine pay scales and increase wages to ‘avoid’ the whole overtime, timecard issue make sure your employees are properly classified as exempt. This would be the best first step and after you follow the suggested process below, an HR attorney can help you ensure your determination is correct.
Exempt or Non-Exempt?
The most common exemption categories include Executive/Managerial, Administrative, Professional, Outside Sales, Inside Sales, and computer Professionals. Federally there is one called Highly Compensated employees but this cannot be used in California and it is moving to $135,000/year. Each category has defined criteria it must meet that can be found on the California Chamber of Commerce website as well as questions and checklists to help in your assessment.
Lou Storrow, and HR Attorney in Carlsbad, CA recommends that you first start with the job description and, if not clear, conduct interviews with the manager to determine if a position is exempt or not. The key he says is to ask open ended (non-leading) questions when possible. When a manager does not have a level of certainty you may have to ask the employee directly or observe their work for a period of time. Keep detailed notes.
Some key points from the CalChamber website:
· In order to be considered an exempt employee in California, an employee will generally need to meet a strict duties test. For most exemptions, more than fifty percent of an employee's time must be spent performing exempt job duties.
· The job title, no matter how high level a description, will not define if a person is exempt or not.
· To determine whether the California employee is primarily engaged in exempt work, the California's Labor Commissioner examines the work performed by the employee during the workweek.
· Most California employees who are classified as exempt customarily and regularly exercise discretion and independent judgment in their jobs. Discretion and independent judgment involve comparing and evaluating possible courses of action and making a decision after considering various possibilities.
Yes, you have some work to do but look at all this with ‘the glass half full’. When you either move employees to an hourly basis or verify that an employee’s job is exempt (or not) you significantly reduce your future liability for any overtime or class action lawsuits. Consider this an exercise is good risk management.
What’s next for employers to get figured out – California Secure Choice. We’ll send out a summary for you on this item in our next ‘Hiring Insights’.
Until then if we can be of service to help you build your team with top talent through contract or direct hire, give us a call for a free consultation.