In our previous news letter, the subject of exempt vs. non-exempt employee status was discussed on the federal level. As discussed last month, many states have enacted their own rules on exempt status and it is imperative for you to know and understand the rules that govern your business in your state. In response to demand, we take this opportunity to discuss the topic of exempt employee classifications in more detail for our California readers.)
Under California and federal law, there are salary and duty requirements that must be met in order for a position to be considered “exempt” from overtime, meal and rest break laws. Requirements for determining who is exempt can be vastly different under state and federal rules. Federal law provides the “floor” or minimum requirements that all states must meet, whereas states, like California, may provide greater legal protections or a “ceiling” for determining how workers will be classified as exempt. The first requirement we will tackle here is determining the salary requirements for those who are exempt.
Generally, in California, the minimum salary required for exempt status is $33,280 annually. The minimum salary in California is calculated such that an employee earns no less that two-times the state minimum wage for full time employment. Full time employment is defined in California Labor Code section 515(c) as 40 hours per week. This means when the state minimum wage is raised in California, the minimum salary for exemption will rise accordingly.
It is important here to discuss the salary requirement as it relates to exempt status. The U.S. Department of Labor has defined “salary” as:
“Being paid on a ‘salary basis’ means an employee regularly receives a predetermined amount of compensation each pay period on a weekly, or less frequent, basis. The predetermined amount cannot be reduced because of variations in the quality or quantity of the employee’s work. Subject to exceptions listed below, an exempt employee must receive the full salary for any workweek in which the employee performs any work, regardless of the number of days or hours worked. Exempt employees do not need to be paid for any workweek in which they perform no work.
Improper deductions from an exempt employee’s salary can lead to the destruction of the exemption and possible unpaid overtime.
If the employer makes deductions from an employee’s predetermined salary, i.e., because of the operating requirements of the business, that employee is not paid on a “salary basis.” If the employee is ready, willing and able to work, deductions may not be made for time when work is not available.”
Improper deductions from an exempt employee’s salary can lead to the destruction of the exemption; additionally it may result in the exemption being lost for the period of time in which the improper deduction was made, and possible unpaid overtime. There are some limited exceptions in which deductions can be made from an exempt employee’s salary; please note the exceptions listed below are in accordance with California regulations, which do not always follow the federal rules on the same issue. Circumstances in which an employer may make deductions from exempt employees’ salary:
Deductions Circumstances For Exempt Empployees
- An exempt employee is absent from work for one or more full days for personal reasons other than sickness or disability;
- For absences of one or more full days due to sickness or disability if the deduction is made in accordance with a bona fide plan, policy or practice of providing compensation for salary lost due to illness;
- To offset amounts received as jury, witness fees, or for military pay;
- During the initial or terminal week of employment;
- For weeks in which an exempt employee takes unpaid leave under the Family and Medical Leave Act. In these circumstances, either partial day or full day deductions may be made.
There are a few exceptions to the salary rule that are specific to certain jobs; for example, there is a “Computer Professional Exemption” that allows a qualifying position to be paid on an hourly basis. The rate that must be paid is adjusted annually. Effective January 1, 2009, the rate in effect was $37.94 per hour. There is a very strict duties test that must be met in order to qualify for this exemption.
This brings us to the subject of the “duties” tests. Federal laws for determining exemption are based on a qualitative evaluation of whether the primary duties of a worker meet standards for what is traditionally considered exempt status, regardless of the amount of time spent performing certain work tasks. Generally, work that can be performed with little or no supervision and instruction and requires an exercise of independent discretion and analysis is considered of an “exempt” nature.
California, however, increases the scrutiny imposed on classifying individuals as exempt. Those workers who are “primarily engaged in” performing exempt duties and for “more than one-half of the work time” are considered exempt in California. This means that California employers must make sure that “exempt” employees are paid a salary equal to two-times the minimum wage requirement, perform “exempt” work, and for more than half the time. It is not enough that these employees meet the lesser (federal) standard of being only “primarily engaged” in exempt work. Anything less than performing exempt duties for 51% of the time will require an employee to be classified as non-exempt.
In addition, California has exceptions specific to certain positions, such as pharmacists. Pharmacists qualify as exempt under federal law but California does not permit the same exemption. However, if a pharmacist qualifies under the executive or administrative criteria they can qualify for exempt status. A similar situation exists for the majority of registered nurses with the exception of five distinct nursing positions. Where there is a difference between state and federal law, typically the higher of the two standards will apply, again, the goal being to provide more protection to workers.
As you can see, it can be quite a cumbersome chore to determine the proper employee status with regard to exemptions. The repercussions for misclassifying a position can be financially disastrous. It is important to discuss classifications with your human resources professional or legal counsel to avoid classification errors.