California employers may be facing a new set of white collar salary regulations as proposed changes to the Fair Labor Standards Act Policies could raise thresholds above California statutes. Klinedinst Attorney Lindsey Casillas analyzes the proposed changes, and breaks down how these could affect California employers.

By Lindsey N. Casillas, Esq.

The Fair Labor Standards Act (“FLSA”) establishes minimum wage, overtime pay, record-keeping, and youth employment standards affecting employees in the private sector and in federal, state, and local governments. The FLSA provides certain exemptions, including a white collar exemption that exempts certain executive, administrative, and professional employees from federal minimum wage and overtime requirements. Currently, to qualify for exemption, a white collar employee must:

1. Be salaried, meaning that the employee is paid a predetermined and fixed salary to get a job done – not work a set number of hours;
2. Be paid at least $455 per week (the equivalent of $23,660 annually for a full-year employee); and
3. Primarily perform executive, administrative, or professional duties, as provided in the Department of Labor’s regulations.

Unless exempt, employees covered by the FLSA must receive overtime pay for all hours worked over 40 in a workweek at a rate not less than one and one-half times their regular rates of pay.

Previously, the FLSA white collar exemption has been largely irrelevant to employers in California, because California law applies different exemption tests that offer greater benefits to California employees – including a higher salary threshold for exemption.  Unlike the FLSA salary exemption component – which is fixed at $455 per week and has not changed since 2004 – the California salary exemption component is directly tied to California’s minimum wage – requiring a “white collar” exempt employee in California to earn a fixed salary equivalent of at least two times the state minimum wage for full-time employment or at least $720 per week ($37,440 annually for a full-year employee). (California Labor Code 515a).  This amount in California is scheduled to increase to approximately $800 per week ($41,600 per year) when California’s minimum wage increases to $10.00 per hour on January 1, 2016.

But new proposed legislation may change all that.

Recently, the U.S. Department of Labor (“DOL”) has announced a proposed rule change to the FLSA which will raise the white collar salary exemption threshold from a fixed salary of $455 per week (the equivalent of $23,660 annually for a full-year employee) to “the standard salary level at the 40th percentile of weekly earnings for full-time salaried workers” or approximately $970 a week ($50,440 a year) in 2016. The DOL aims to close a loophole created by its fixed $455 per week minimum amount that has allowed some employers to compensate executive, administrative and professional employees expected to work 50 or 60 hours per week at less than the poverty level.

If the rule is enacted, this will be the first time in many years, where the FLSA’s white collar salary exemption is higher than the California law equivalent salary exemption; and it will be costly.  The DOL estimates that its proposed regulations will cause 4.6 million currently exempt white collar employees to become eligible for overtime pay and potentially will result in costs of $240-$250 million to employers.

Proactive California employers can prepare for these anticipated regulatory changes by identifying positions within their organization which are currently classified as exempt that might no longer be exempt upon the enacting of the proposed new higher minimum salary threshold.  For employees who may no longer qualify as exempt white collar employees under the proposed new DOL regulations, employers will want to evaluate if it is practical to give raises to meet the new threshold, pay overtime, or limit employees’ hours to fewer than 40 per week.

At this time, the proposed rule does not establish a new standard for determining whether an employee meets the minimum test relating to the employee’s primary job duties.  Instead, the DOL invites public comment on a series of questions about the adequacy of the current duties test.  Nonetheless, California employers will need to be on the lookout for any changes in the federal law that will affect their standard of classifying employees. The rule is expected to go into effect next year.