New Federal Overtime
Regulations Mean Little to California
Employers
On
August 23, 2004, new overtime regulations issued by United StatesDepartment of Labor (DOL) went into effect. These
new regulations were in large part intended to address the so-called
"white collar" exemptions to the overtime laws: the executive,
administrative, professional, outside sales and computer professional
exemptions. The new regulations also establish a new exemption for
"highly compensated employees" whose total compensation is at
least $100,000 a year. The DOL claims that the increased clarity will cut
back on the surge in wage and hour class-action litigation.
While
these new regulations have received a great deal of publicity in the
national press, the fact is that the regulations have basically no impact
on private employers in California.
The
DOL regulations specifically state that they do not preempt state laws that
offer more protections to employers. As California
employers well know, California
has stringent regulations governing wage and hour laws and the so-called
white-collar exemptions. These state regulations, as set forth in the wage
and hour orders, provide greater protection to California employees than the revised
DOL regulations and thus will remain law.
As
things stand, the California
tests for exempt employees will remain unchanged. The federal changes will
only affect California
businesses with operations in other states and government employers.
Legislative relief from California's
stringent overtime requirements does not appear realistic in the near
future.
Minimum Salary a Key Difference between California and Federal Law
One
of the main differences between California
and federal law is the minimum salary level that must be paid in order for
the employee to be considered exempt. California law places a higher minimum
salary threshold that must be met.
In
order for employees to meet the executive, administrative or professional
exemption from overtime pay under the new DOL regulations, the employees
must make at least $455 per week which is about $23,660 per year. In California, the
minimum pay required to be exempt from overtime is two times the minimum
wage which would currently put the employee at $28,080 annually.
The
minimum salary test for the computer professional exemption under federal
law is: salary or fee basis at a rate not less than $455 per week or on an
hourly basis, at a rate not less than $27.63 an hour. The test under California law is
more stringent: $44.63 per hour.
Duties Test another Key Difference
California allows an
exemption to the overtime rule for employees who spend more than half of
their time engaged in exempt work or work that is closely related to exempt
work and carries out an exempt function. For instance, California allows an executive employee
exemption to the overtime rule for employees who spend more than 50% of
their time on duties that are managerial and
require use of discretion and judgment. Overtime must be paid even to
so-called "salaried" employees, if they spend more than half of
their times performing non-managerial tasks, such as cashiering, stocking
shelves, or cleaning. Job title is irrelevant; actual job duties performed
are the key.
However,
under the federal DOL regulations, the executive exemption test revolves
around the employee's "primary duty." For instance, to meet the
executive exemption federal law asks: is it the "primary duty" of
the employee to manage the enterprise. Primary duty under the federal
regulations means the principal, main, major or most important duty the
employee performs. The determination will be made under federal law by
looking at the character of the employee's job as a whole.
California's requirement, that the employer show that more than 50% of the
employee's time is spent engaged in exempt work, is much more
stringent and requires a thorough analysis of the employee's actual job
duties.
California Has A Daily Overtime Requirement
Another
critical difference between state and federal law is that California provides for daily overtime
while federal law does not. What this means is that in California an employee is entitled to
time-and-one-half the regular rate of pay for hours worked in excess of
eight (8) hours in one day. Employers must pay double the employee's
regular rate of pay for hours worked beyond twelve (12) in a single
workday.
Federal
law does not have a daily overtime requirement. Federal law has a weekly
overtime requirement that provides that hours worked in excess of forty
(40) straight-time hours in one (1) week are paid at time-and-one-half.
California also has
the weekly overtime requirement. Moreover, California has a seventh (7th) workday
rule. Employees must be paid time-and-one-half the regular rate of pay for
the first eight (8) hours worked on the seventh consecutive day worked in a
workweek. Double time must be paid for all hours worked beyond eight (8) on
any seventh (7th) consecutive day of a workweek.
One
important fact to remember is that only straight-time hours apply toward
computing overtime for hours in excess of forty (40) in a week. Daily
overtime hours, paid at time-and-one-half the normal rate, do not count
toward the forty (40) hour weekly limit.
Relevance of Federal
Safe Harbor
Procedure
Federal
regulations have created a new "safe harbor" procedure that may
be useful for California employers to
adopt, even if it is not currently recognized under California law.
The
safe harbor procedure under the DOL regulations allows employers who have
mistakenly made impermissible deductions from the paychecks of exempt
employees to correct those mistakes.
Under
the new federal law, an employer will not lose the exemption for any
employees subject to an improper deduction if the employer (1) has a
clearly communicated policy, with a complaint mechanism, that prohibits
improper deductions, (2) reimburses employees for any improper deductions,
and (3) makes a good-faith commitment to comply in the future.
However,
the safe harbor protection will be lost if the employer continues to
willfully violate the law by continuing improper deductions even after
receiving employee complaints. The DOL has indicated that the best evidence
of a "clearly communicated policy" is a written policy
distributed to all employees.
While
not recognized under California law, California employers
are wise to adopt a formal safe harbor policy. Doing so may help reduce an
employer's liability in misclassification lawsuits where the employee seeks
damages for violation of both federal and state law. The policy might also
help reduce liability for claims of willful violations.
Audit Classifications to Reduce Liability
The new federal regulations should act as a reminder to
employers that they should regularly review the job descriptions and actual
daily duties of employees to determine if they have been properly
classified as exempt.
Simply
looking at whether others in the industry have classified the employees as
exempt is not sufficient. Industry standards are not taken into account
under federal or state law. The actual job duties of the employee must be
examined.
Employers
should also have written job descriptions that state whether an employee is
exempt or non-exempt.
Particular
attention should be paid to those employees who are labeled as exempt
managerial employees. This has been an area of common misclassifications
and a great deal of class-action litigation.
Audits
of employee classifications should be done yearly or whenever there is a
major reorganization. Use of competent labor and employment counsel to
conduct such audits is recommended. Use of outside counsel may afford audit
papers and any decisions as to how to handle misclassified employees
privileged protection.
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