As an employer in California, it is important to be aware of and understand the wage and hour rules and regulations set forth in the Labor Code. An employer’s failure to do so can lead to lengthy and costly litigation. One of the most common violations California employers encounter stems from misclassifying their employees, thereby creating potential liability under the California Labor Code.
Employee Classifications:
Employees are typically classified in one of three categories – exempt, nonexempt, or independent contractor. There is no blanket rule to determining an employee’s classification, however, the Industrial Welfare Commission provides guidance to employers for each category by setting forth specific tests and considerations. Depending on their job description and accompanying job duties, employees in California will generally be classified as either exempt or nonexempt. By applying the tests provided by California state law, the proper classification for each employee may be determined.
Independent contractors can generally be classified as exempt because they do not qualify for overtime compensation. However, there is a specific test applied to determine if a worker meets the qualifications of an independent contractor, which is discussed in more detail in a separate article on our blog. For more information, please check our article about independent contractors.
Overtime Pay:
In general, nonexempt employees must receive pay at 1.5 times their regular rate for all hours worked in excess of 40 hours per workweek. An employee may also be eligible for 2 times their regular rate if they work more than 12 hours in one day, or more than eight hours on the seventh consecutive day of the workweek. There are significant qualifications to overtime pay requirements.
Who is exempt from overtime laws?
Most employees in California are classified as nonexempt and qualify for overtime compensation. It is extremely important for employers to be careful when deciding whether to deny overtime or how to classify their employees because employment laws are continuously changing and becoming more stringent as to what exactly qualifies as exempt. If an employer wants to classify an employee as exempt, the employer must make sure to strictly adhere to the Labor Code and any changes in the law.
Under Section 515 of the California Labor Code, employees can be exempt as an executive employee, administrative employee, or professional employee, as long as the following requirements of this Section are met:
(1) The employee must be primarily engaged in duties that meet the test of exemption;
(2) The employee must customarily and regularly exercise discretion and independent judgment in performing those duties; and
(3) Earns a monthly salary equivalent to no less than two times the state minimum wage for full-time employment.
California’s Time Requirement:
Under California Law, to satisfy the first requirement under Section 515, an employee must meet the factors described under the duties of either executive employees, administrative employees, or professional employees and must be “primarily engaged” in those duties for more than one-half of the employee’s work time. In other words, the employee must not occasionally be involved in exempt duties, but rather they must consistently engage in exempt duties during their shift. This is very different from federal law, which simply requires that the “primary duty” of the employee falls within exempt duties.
The Duties Requirement:
Each of the exemptions has specific duties to consider for classifying a worker. In a lawsuit, the court will examine the work actually performed by the employee and weigh these factors on a fact-specific basis to determine if the employee actually satisfied the test for exemption more than 50% of the employee’s work time. The title of an employee is not given much regard because the court will ultimately look at the actual work performed. Overall, the employee must have some level of authority to make independent choices in their work.
Executive Exemption: There are many factors to consider when classifying a worker as an executive employee. A person employed in an executive capacity means any employee whose duties involve management of the business where he/she is employed, that regularly directs the work of 2 or more other employees, that has authority to hire or fire other employees or whose suggestions and recommendations to firing or hiring has weight, and who customarily exercises discretion and independent judgment. Executive exemption also includes work that is directly or closely related to exempt work and work that helps carry out exempt functions.
Administrative Exemption: Some factors to consider for classifying a worker as an administrative employee include duties that involve office or non-manual work directly related to management or business operations of the employer, performance of functions in the administration of school systems and educational institutions, or work that is directly related to academic instruction or training. The court also considers whether the worker executes special assignments and tasks, or work that requires special training or experience under general supervision.
Professional Exemption: Professional employees include employees that are licensed or certified by the State of California and are primarily engaged in professions like law, medicine, dentistry, optometry, architecture, engineering, teaching, or accounting. Employees that work within the artistic or learned professions are also included, like those with work that depends on their talent, or those with knowledge in advanced fields or specialized intellectual instruction and study.
If an employee satisfies the duties and time requirements and receives double the amount of the minimum wage requirement, they can be properly classified as exempt. There are many other professions that can qualify for exempt status. However, as an employer it is extremely important to speak with an attorney to ensure you are complying with the state wage & hour laws.
The Minimum Annual Salary Requirement:
Lastly, and most importantly, for an employee to qualify as exempt they must earn a salary equal to no less than two times the applicable minimum wage. In the event an employee’s annual salary is not equal two or in excess of two times the applicable minimum wage, then they cannot qualify as exempt regardless of their job duties and other considerations. As such, it is imperative as an employer in California to stay up to date on the ever-changing applicable minimum wage.
When the applicable minimum wage is raised, it is important to revisit the annual salary of any exempt employees to ensure their annual salary is still equal to or greater than two times the new minimum wage. If a recent minimum wage increase has resulted in an otherwise exempt employee’s annual salary falling below the required minimum amount for exempt employees, either their salary must be raised accordingly or they must be treated as a nonexempt employee from the date the minimum wage increase took effect.
What are the penalties for violating overtime laws?
If employers misclassify employees, employers can be required to pay fines and penalties for wage violations in the form of back pay and benefits. California Labor Code section 226.8 also imposes a civil penalty of up to $25,000 per violation on an employer that willfully misclassifies individuals as exempt. As noted earlier, it is important that employers refrain from intentionally misclassifying employees as exempt merely to avoid paying overtime and providing the employee with benefits.
How can I comply with California overtime laws?
Understanding and complying with the complex and ever-changing wage and hour laws at the local, state and federal level can feel impossible. At Rupal Law, our attorneys have significant experience advising employers on how to manage any wage and hour lawsuit they may encounter, and how to ensure compliance with the Labor Code moving forward to avoid any subsequent wage and hour lawsuits. For an obligation free consultation, please email us at info@rupallaw.com, or give us a call at (951) 460-0830.
