04 Oct The Effect of the New Federal Overtime Rule on California Businesses
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 3 years, beginning January 1, 2020, to help keep up with inflation.
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 U.S. Department of Labor anticipates that 4.2 million additional workers will qualify for overtime under the new rule, while the Economic Policy Institute estimates that 12.5 million workers will directly benefit from it. Although many businesses, especially smaller ones, oppose the new overtime law, others strongly support it, including Vice President Joe Biden who believes the rule “goes to the heart of the defining issue of our time, that is restoring and expanding access to the middle class.”
Indeed, the number of full-time workers who qualify for overtime pay based on their salary has dropped from 62% in 1975 to 7% today, according to the Obama administration. Under the new rule, 35% of full-time workers are expected to qualify for overtime pay.
With the rule set to take effect in a few weeks, this article explores its effect on California businesses and how California employers can prepare for it.
Under the new rule, 35% of full-time workers are expected to qualify for overtime pay.
How Will This Rule Affect California Employers?
The rule will affect California employers much less than employers in other states. Currently, in order 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. 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, whereas in other states the rule increases the threshold by $23,816.
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.
|Year||California Minimum Exempt Salary||Federal Minimum Exempt Salary|
(In 2020 and every 3 years after, the Labor Department will set the federal minimum exempt salary at the 40th percentile of weekly earnings for full-time salaried workers in the lowest wage Census Region, which is an unknown amount as of this time.)
Additionally, 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.
Are There Other Differences from the California Overtime Rules?
Absolutely. Whenever California’s overtime laws are more strict than the federal rules, California’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:
- 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% of the $47,476 salary threshold with nondiscretionary bonuses, incentive payments, and commissions, assuming they are paid at least quarterly. California, however, does not allow for this, and the employee must meet with the minimum threshold exclusive of these types of payments.
How Can Californians Prepare For the New Overtime Rule?
California employers with salaried employees who are currently not earning overtime pay should consult an attorney experienced in employment law to make sure their employees are correctly classified. California employers may find it cheaper to hire additional employees rather than pay overtime to newly qualified employees, and they should discuss this option internally and with their legal counsel. California employees who think they may qualify for overtime under the rule should discuss the new rule with their employer.