New California Employment Law

A recent change in California law, enacted by the state Legislature, means California employers must now be more careful when paying employees a salary that previously included overtime.

Generally, the California Labor Code requires that employers pay overtime when a non-exempt employee works more than eight hours in one day, or forty hours in one week.  Specifically, a non-exempt employee is to be paid one and a half (1½) times their regular hourly pay rate when working more than 8 hours in any one work day and/or 40 hours in a work week and twice their regular hourly pay rate when working more than 12 hours in a day, or more than eight hours on the seventh consecutive workday in a week.

California does not require that an “exempt” employee be paid overtime, but it can sometimes be difficult to determine whether an employee is exempt.  An exempt employee is generally one who is (a) paid a monthly salary equivalent to no less than two times the state minimum wage for full time (40 hours per week) employment; and (b) can accurately be classified as an executive, administrative or professional employee.

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.  California recognizes several general exemptions[1], however, there are other Wage Orders for specific industries that contain exceptions to the general rules for calculating overtime and premium pay.

Prior to January 1, 2013, California followed the California Court of Appeal’s 2011 decision in Arechiga vs. Dolores Press, Inc., in which the Court decided an employer and employee could agree that a salary would serve as compensation for all regular and overtime hours worked and, therefore, the non-exempt employee was entitled to no additional overtime.  This has been referred to as the “explicit mutual wage agreement doctrine.”

California’s Legislature did not agree with this approach and changed the law, effective January 1, 2013.  Assembly Bill 2103 amended Labor Code Section 515(d) to provide that a fixed salary paid to a nonexempt employee is for the employee’s non-overtime hours only, “notwithstanding any private agreement to the contrary.”  Thus private employer-employee agreements that a non-exempt salary covers overtime would not be permitted and non-exempt employees would have to be compensated for all hours worked over eight hours in one day, or 40 hours in one week.

It is extremely important that an employer make a careful determination as to whether an employee is exempt.  If it is clear that an employee is exempt, paying the employee a salary is perfectly acceptable regardless of the number of hours worked.  If the employee is not exempt, even if he/she is paid a salary and even he/she agrees otherwise, the employee must be paid for all overtime hours in addition to that salary.

[1] Executive.  The executive exemption usually is applied to managerial employees.  However, managers still have to meet the requirements for the exemption.  If they do not, they must be classified as nonexempt, unless they satisfy one of the other exemptions.
Administrative.  The administrative exemption applies to a wide variety of employees.  However, not all employees whose jobs involve administrative work will satisfy the tests for the administrative exemption and must be classified as nonexempt.
Professional Employee.  Although an employee commonly may be considered a “professional,” there are specific legal requirements that must be met to qualify for the professional exemption.
Computer Professional.  Although federal law has exempted certain computer professionals from overtime for a number of years, state law had no corresponding exemption.  California law was amended in 2000 to create an overtime exemption, similar to its federal counterpart, for computer professionals.
Salesperson.  For purposes of defining exempt vs. nonexempt status, salespeople are grouped into two categories: outside salespeople and inside salespeople.
Artist.  Relatively few individuals qualify for exemption as members of artistic professions in California, since most of those who have sufficient control over the nature of their own work and over their work hours are self-employed.