By Josh Garber
Starting December 1, 2016, a new federal wage rule goes into effect that will require employers to pay overtime to workers who make less than $47,476 per year. Under the new rule, the federal government will update this salary threshold every three years, beginning January 1, 2020, to help keep up with inflation.
With the rule about to take effect, we’ll look at its implications for California businesses and what California employers can do to prepare. But first, a bit of background.
A Quick Primer on the New Rule
Currently, federal law requires employers to pay overtime to workers who make less than $23,660 per year and who don’t qualify for either an executive, administrative or professional exemption. Federal law also allows for employers to avoid paying overtime to highly compensated workers who earn more than $100,000 annually. (Under the new rule, the minimum pay for the highly-compensated worker exemption is increased to $134,004.)
The new Federal Overtime Law means 4.2 million more workers will qualify for overtime.
The number of full-time workers who qualify for overtime pay based on their salary has dropped from 62 percent in 1975 to 7 percent today, according to the Obama administration. Under the new rule, 35 percent of full-time workers are expected to qualify for overtime pay.
But with the new rule, the U.S. Department of Labor anticipates that 4.2 million additional workers will qualify for overtime, and the Economic Policy Institute estimates that 12.5 million workers will directly benefit.
Although many businesses, especially smaller ones, oppose the new overtime law, others strongly support it. Vice President Joe Biden also favors it, saying the rule “goes to the heart of the defining issue of our time, that is restoring and expanding access to the middle class.”
Less of an Impact in California Than in Other States
The first thing for California employers to know is that, interestingly, the rule will affect them much less than employers in other states.
Currently, to qualify for an overtime exemption in California, employees must earn at least $41,600 per year, in addition to having duties that qualify them for either an executive, administrative or professional exemption.
To qualify for an overtime exemption in California, employees must earn at least $41,600 per year.
With California’s minimum wage rising to $15 per hour by 2022, the minimum salary needed to qualify for an overtime exemption was set to rise to $43,680 as of January 1, 2017, meaning that the federal rule increases the threshold by $3,796 in California. This is quite a lot less than in other states, where the threshold will grow by $23,816.
As shown in the table below, based on the increasing minimum wage in California, beginning January 1, 2019, the minimum salary needed to qualify for an overtime exemption in the state will actually surpass the new federal minimum.
It’s also important to note that California does not allow employers to give an exemption for highly-paid employees. As a result, California employers will not be affected by the increase of the minimum pay employees need to make to qualify for this exemption.
Comparing Federal and California Overtime Rules
Are there differences between the new federal rule and those in California? Absolutely. And whenever California’s overtime laws are more strict than the federal rules, the state’s laws will apply.
For example, under the federal rules, a non-exempt employee is only entitled to overtime for working more than 40 hours in a week. In California, however, non-exempt employees are entitled to overtime:
California does not allow employers to give an overtime exemption to highly-paid employees.
- If they work more than 40 hours in a week
- If they work more than 8 hours in a single day
- If they work 7 consecutive days in a single week
Under the federal rule, employers in other states can satisfy up to 10 percent of the $47,476 salary threshold with nondiscretionary bonuses, incentive payments and commissions, assuming they are paid at least quarterly. California doesn’t allow for this; the employee must meet with the minimum threshold exclusive of these types of payments.
How to Prepare Your Business
Next steps for both employers and employees in California are pretty straightforward:
If you’re a California employer with salaried employees who are currently not earning overtime pay, you should consult an attorney experienced in employment law to make sure your employees are correctly classified. You might find it cheaper to hire additional employees rather than pay overtime to newly qualified employees.
If you’re a California employee who thinks you might qualify for overtime under the new rule, it’s something to discuss with your employer.