In most cases, there are three simple requirements to determine whether a worker is an exempt employee under California law:
- Minimum Salary. The employee must be paid a salary that is at least twice the state minimum wage for full-time employment.1
- White Collar Duties. The employee’s primary duties must consist of administrative, executive, or professional tasks.2
- Independent Judgment. The employee’s job duties must involve the use of discretion and independent judgment.3
If all three requirements are met, the employee will usually be classified as “exempt.” There are, however, many caveats to this test. And some employees are only partially exempt—meaning they are protected by certain labor laws, but not others.
This article explains these requirements in greater detail, as well as what happens when employers fail to property classify their employees under California Law.
- 1 The Salary Requirement
- 2 The White Collar Duties Requirement
- 3 Discretion and Independent Judgment
- 4 Job-Specific Exemptions
- 5 Consequences of Misclassification
- 6 What to Do If You’ve Been Misclassified
The Salary Requirement
A salary, for these purposes, is an unvarying minimum amount of pay.6 The employee’s pay must be predetermined, and cannot change based on the number of hours worked or the quality of the work performed.7
Courts have suggested that employers can deduct from an employee’s pay for full-day absences and still consider the employee to be paid on a salary basis.8 But the employee would no longer be considered “salaried” if the employer deducted for partial-day absences.9
If the employee’s pay is based on the number of hours worked with no minimum guarantee, the employee will be treated as being an hourly employee (an thus nonexempt).10
Calculating the Minimum Salary
As mentioned above, California law requires the employee to be paid a monthly salary of at least twice the state minimum wage for full-time employment to qualify as exempt. For these purposes, Full-time employment is considered 40 hours per week.11
At present, there are two possible amounts for an employee’s minimum wage. Employees that work for an employer with 25 or fewer employees are entitled to a minimum wage of $10.00 per hour.12 Employees that work for an employer with more than 25 employees are entitled to be paid $10.50 per hour, as of January 1, 2017.13
So, to meet the minimum salary requirement, the applicable minimum wage must be multiple by two, and then multiplied by 40 hours per week. That gives us a weekly salary that is twice the minimum wage.
If the applicable minimum wage is $10.00, the minimum salary is $800.00 per week (or $3,466.66 per month). If the applicable minimum wage is $10.50, the minimum salary is $840.00 per week (or $3,640.00 per month).
The White Collar Duties Requirement
If the salary requirements are met, the next question is whether the employee is employed in an administrative, executive, or professional capacity.14 This is sometimes called the “white collar duties” test.
To determine whether an employee is employed in an administrative, executive, or professional capacity, we look at which duties the employee actually performs—regardless of job title or how the job is defined in a position description.15
Importantly, the white collar duties test focuses on the employee’s primary duties. California law requires an employee to devote more than half of his or her working hours to the primary duty in order to satisfy this test.16
An employee who meets this test will be exempt from several rights, including:
- The right to meal breaks and rest periods,
- The right to overtime compensation, and
- The right to a minimum wage (provided, of course, that they met the minimum salary requirement).17
It is therefore important to carefully determine whether an employee meets all requirements of the test.
An employee is considered employed in an administrative capacity if their primary duty is office or nonmanual work directly related to management or general business operations.18
Work relates to management or general business operations when the employee assists in running the business.19
Secretaries, store clerks, bookkeepers, and lead operators on production lines cannot be classified as administrative employees because they do not help run the business.
Examples of duties that relate to management or general business operations include responsibility for marketing, research, budgeting, finance, accounting, purchasing, quality control, human resources, labor or government relations, regulatory compliance, and database administration.20
An employee is considered employed in an executive capacity when:
- Their primary duty is the management of a business or one of its departments;
- They regularly direct the work of two or more other employees; and
- They have the authority to hire and fire employees, or to make recommendations about hiring, firing, promotions, and wages that are given particular weight.21
Management includes such activities as hiring, firing, training, supervising, and disciplining employees; making work assignments; resolving employee grievances; maintaining production or sales records; ordering materials or inventory; and planning a budget.22
Executive employees receive little direct supervision.
There are three types of professional employees that can qualify for exemptions:
- Licensed Professionals. People who are licensed or certified by the State of California and are primarily engaged in the practice of: law, medicine, dentistry, optometry, architecture, engineering, teaching,23 or accounting.24
- Learned Professionals. People who have advanced knowledge in a field of science or learning that is customarily acquired by prolonged and specialized study.25
- Creative Professionals. People who focus on invention, imagination, originality, or talent in a recognized field that is artistic or creative.26
The professional employee exemption is fact-specific and depends on the nature of the work that the employee primarily undertakes.
Of note, registered nurses who are employed to engage in the practice of nursing are not exempt professionals, but they might still be exempt as administrators or executives.27
Discretion and Independent Judgment
To qualify as an exempt employee, California’s Labor Code requires the worker to regularly exercise discretion and independent judgment in performing their duties.28
An employee exercises discretion and independent judgment when the employee makes and implements important choices after considering competing courses of action.29
An employee’s judgment is independent when it is free from immediate direction or supervision, even if an employee who is higher in the management chain has the authority to override the decision.30
In addition to the main exemptions explained above, a handful of other occupations are exempt from some or all of California’s labor laws. The more common exemptions are discussed below.
Employees who are paid on a commission basis are sometimes exempt from California’s overtime pay laws. To qualify for this exemption, the following requirements must be met:
- The employee’s earnings are more than one-and-a-half times the minimum wage.
- Commission payments constitute more than half of the employee’s total compensation.
- They work in either: the retail industry, or a professional, technical, or clerical occupation.31
Commissions are wage payments that an employee is entitled to as a result of sales they make. In a commission-based arrangement, the size of the employee’s compensation depends on the amount or value of the thing that was sold.32
A discretionary payment that an employer can choose to pay or withhold, such as a performance bonus, is not a commission even if it is computed as a percentage of sales or profits.33
Physicians and Surgeons
Licensed physicians and surgeons are sometimes exempt for the purposes of overtime compensation. To fall under this exemption, the physician or surgeon must:
- Be paid at an hourly rate of at least $55.00 per hour.
- Perform, as their primary duties, tasks that require them to be licensed.34
The applicability of this exemption is limited. Medical interns and residents do not qualify. Nor do physicians covered by certain types of collective bargaining agreements.35
Employees in the computer software field are sometimes exempt for the purposes of overtime compensation.36 To qualify for this exemption, the following requirements must be met:
- The employee must be primarily engaged in work that is intellectual or creative.37
- The employee’s primary duties must require the exercise of discretion and independent judgment.38
- The employee must be highly skilled in a field of computer systems analysis, programming, or software engineering.39
- The employee’s primary duties must involve designing or developing computer hardware or software.40
- If the employee is hourly, they must be paid at least $42.35 per hour.41
- If the employee is salaried, they must earn at least $88,231.36 per year.42
Private School Teachers
Many teachers are exempt under the professional exemption described above. But some teachers at private schools are exempt even if they don’t meet those requirements. Instead, they will be considered exempt if:
- They teach students who are in kindergarten or any of grades 1 through 12,
- They earn at least twice the state’s minimum wage, and
- They hold a baccalaureate degree (or higher) from an accredited institution of higher learning, or they meet the requirements for a teaching credential from California or any other state.43
Employees who are considered “outside salespersons” are generally considered exempt employees.44 An outside salesperson is defined as someone:
- Who is at least 18 years old,
- Who spends more than half of their working time away from their employer’s place of business, and
- Who sells items, services, contracts, or the use of facilities.45
Some truck drivers are exempt from California’s overtime laws (but not other employment rights, like meals breaks or the minimum wage).46 This exemption applies to interstate truck drivers and drivers who transport hazardous materials.47
Union employees are sometimes exempt from California’s overtime laws.50 To qualify as exempt, the employees must be employed under a collective bargaining agreement that expressly provides for the wages, hours of work, and working conditions of the employees.51
The collective bargaining agreement must also provide premium wage rates for all overtime hours worked and a regular hourly rate of pay of at least 30 percent more than the state minimum wage.52
Consequences of Misclassification
California courts narrowly construe the exemptions explained above. The employee must “plainly and unmistakably” meet the standard required for the exemption.53 Otherwise, the employee should be classified as nonexempt.
This standard strongly favors the employee, and the employer has the legal burden of proving an exemption.54 When employers fail to properly treat their employees as nonexempt, the consequences can be severe.
California law provides for a variety of penalties for Labor Code violations. Some of the most common examples are below.
Nonexempt employees in California have a right to be paid overtime wages when they work more than eight hours in a workday, 40 hours in a work week, or seven consecutive days.55 When employers misclassify their employees as exempt, they often fail to pay the employee overtime wages.
Employees who have been deprived of overtime pay because of a misclassification can seek back-pay for the unpaid overtime wages the employee earned.56 These can add up quickly, even for employees earning a low amount.
Additionally, the employer may be obligated to pay the legal costs and attorney fees that the employee incurred while pursuing their overtime wages.57
In some cases, there may also be a penalty of $100 or $200 per pay period in which California’s overtime laws were violated.58 That penalty is normally payable to the State of California, but there are some situations in which the employee can recover up to 25% of it.59
Rest Break & Meal Period Penalties
When an employee misses a meal period or rest break, they are entitled to one extra hour of pay at the employee’s regular hourly rate.61
If the employee misses multiple rest breaks or meal periods, they can earn up to one extra hour per workday for their missed rest periods and an additional one hour per workday for their missed meal breaks.62
Thus, a twelve-hour shift with no rest or meal breaks will entitle the employee to two extra hours of pay at the employee’s regular hourly rate.63
Pay Stub Penalties
If the employer failed to keep proper records of the employee’s work, the employer may be obligated to pay the employee a penalty pay stub penalty.64 The amount of the penalty depends on the number of pay periods that the violation lasted.
This penalty often arises when the employee isn’t sure how much back-pay they might be owed because the employer mistakenly classified the employee as exempt.
Waiting Time Penalties
When an employer willfully fails to pay an employee’s wages on-time as requirement by the Labor Code, they can be subject to a waiting time penalty. If an employee has been deprived of their full pay due to being misclassified as exempt, they are sometimes entitled to receive this.
Specifically, a delayed payment can result in a penalty of up to 30 days of the employee’s wages.67 The unpaid wages accrue on a daily basis, not just for the days that the employee might have worked—but also on non-workdays.
What to Do If You’ve Been Misclassified
Employees who have been improperly classified as exempt have three basic options:
- Resolve their dispute informally with their employer,
- File a lawsuit in court, or
- File a wage claim with California’s Division of Labor Standards Enforcement (the “DLSE”).68
The best way to resolve an exemption dispute will depend on the employee’s specific situation. It’s usually a good idea to get the opinion of a lawyer before deciding how to proceed.
Employees should keep in mind, however, that there are strict deadlines they need to meet to file a wage claim or lawsuit. In general, claim or lawsuit must be filed within three years of the alleged meal period violation.69
If you think you have been the victim of employment misclassification, protect yourself and call the work lawyers of Smith & Lo at (310) 340-7677 to learn more about your legal options.
Labor Code, § 515, subd. (a); Cal. Code of Regs., tit. 8, § 11040 [providing that, for each exempted category, the employee must earn “a monthly salary equivalent to no less than two (2) times the state minimum wage for full-time employment”].Footnote 1
Labor Code, § 515, subd. (a) [“The Industrial Welfare Commission may establish exemptions from the requirement that an overtime rate of compensation be paid pursuant to Sections 510 and 511 for executive, administrative, and professional employees, if the employee is primarily engaged in the duties that meet the test of the exemption, customarily and regularly exercises discretion and independent judgment in performing those duties, and earns a monthly salary equivalent to no less than two times the state minimum wage for full-time employment.”].Footnote 2
Labor Code, § 515, subd. (a) [requiring employees to “customarily and regularly exercises discretion and independent judgment in performing” the duties of their job].Footnote 3
Labor Code, § 515, subd. (a); Cal. Code of Regs., tit. 8, § 11040.Footnote 4
Labor Code, § 515, subds. (a), (c).Footnote 5
Negri v. Koning & Associates (2013) 216 Cal.App.4th 392, 395; Kettenring v. Los Angeles Unified School Dist. (2008) 167 Cal.App.4th 507, 513–514.Footnote 6
Negri v. Koning & Associates (2013) 216 Cal.App.4th 392, 398 [“Since federal law requires that, in order to meet the salary basis test for exemption the employee would have to be paid a predetermined amount that is not subject to reduction based upon the number of hours worked, state law requirements must be at least as protective.”]; Kettenring v. Los Angeles Unified School Dist. (2008) 167 Cal.App.4th 507, 513–514 [salary cannot be “subject to reduction because of variations in the quality or quantity of the work performed”], quoting 29 C.F.R. § 541.602(a).Footnote 7
Conley v. Pacific Gas and Elec. Co. (2005) 131 Cal.App.4th 260, 267; 29 C.F.R. § 541.602(b)(1).Footnote 8
Conley v. Pacific Gas and Elec. Co. (2005) 131 Cal.App.4th 260, 267 [“It is undisputed that the combined effect of these provisions of federal law is to preclude employers from docking the pay of an employee for an absence of less than a day (a partial-day absence). If they do, then the involved employees do not meet the salary basis test, and are nonexempt for purposes of overtime pay.”].Footnote 9
Negri v. Koning & Associates (2013) 216 Cal.App.4th 392, 400.Footnote 10
Labor Code, § 515, subds. (a), (c).Footnote 11
Labor Code, § 1182.12, subds. (a).Footnote 12
Labor Code, § 1182.12, subds. (b)(1).Footnote 13
Labor Code, § 515, subd. (a) [“The Industrial Welfare Commission may establish exemptions from the requirement that an overtime rate of compensation be paid pursuant to Sections 510 and 511 for executive, administrative, and professional employees, if the employee is primarily engaged in the duties that meet the test of the exemption, customarily and regularly exercises discretion and independent judgment in performing those duties, and earns a monthly salary equivalent to no less than two times the state minimum wage for full-time employment.”].Footnote 14
29 C.F.R. § 541.2; Negri v. Koning & Associates (2013) 216 Cal.App.4th 392, 398 [“[S]tate law requirements for exemption from overtime pay must be at least as protective of the employee as the corresponding federal standards.”].Footnote 15
Labor Code, § 515, subd. (e) [“For the purposes of this section, ‘primarily’ means more than one-half of the employee’s worktime.”].Footnote 16
Labor Code, § 515, subd. (a); Cal. Code of Regs., tit. 8, §§ 11010–11170 [wage orders of the California Industrial Welfare Commission].Footnote 17
Cal. Code of Regs., tit. 8, §§ 11010–11150, subds. (1)(A)(2) [defining administrative employee under California law]. An employee might also be considered administrative if they perform “functions in the administration of a school system, or educational establishment or institution, or of a department or subdivision thereof, in work directly related to the academic instruction or training carried on therein.” (Id.)Footnote 18
29 C.F.R. § 541.201(a).Footnote 19
29 C.F.R. § 541.201(b).Footnote 20
Cal. Code of Regs., tit. 8, §§ 11010–11150, subds. (1)(A)(1) [defining executive employee].Footnote 21
29 C.F.R. § 541.102.Footnote 22
“Teaching” for these purposes only applies to teaching under a certificate from the Commission for Teacher Preparation and Licensing or teaching in an accredited college or university. (Cal. Code of Regs., tit. 8, § 11040, subd. (2)(R).Footnote 23
Cal. Code of Regs., tit. 8, §§ 11010–11150, subds. (3)(A).Footnote 24
Cal. Code of Regs., tit. 8, §§ 11010–11150, subds. (3)(B).Footnote 25
29 C.F.R. § 541.300 [defining professional employee under the federal FLSA]; Cal. Code of Regs., tit. 8, §§ 11010–11150, subd. (1)(A)(3) [defining professional employee under California law].Footnote 26
Labor Code, § 515, subd. (f)(1).Footnote 27
Labor Code, § 515, subd. (a).Footnote 28
29 C.F.R. § 541.202(a) [“In general, the exercise of discretion and independent judgment involves the comparison and the evaluation of possible courses of conduct, and acting or making a decision after the various possibilities have been considered.”].Footnote 29
29 C.F.R. § 541.202(c) [“The exercise of discretion and independent judgment implies that the employee has authority to make an independent choice, free from immediate direction or supervision. However, employees can exercise discretion and independent judgment even if their decisions or recommendations are reviewed at a higher level.”].Footnote 30
Cal. Code of Regs., tit. 8, §§ 11040, subd. (3)(D), 11070, subds. (3)(D).Footnote 31
Labor Code § 204.1 defines commissions as “compensation paid to any person for services rendered in the sale of such employer’s property or services and based proportionately upon the amount or value thereof.” (See also Areso v. CarMax, Inc. (2011) 195 Cal.App.4th 996, 1003.Footnote 32
See Labor Code, § 2751, subd. (c) [excluding short-term productivity bonuses, bonus and profit-sharing plans that are not based on a fixed percentage of sales or profits, and “[t]emporary, variable incentive payments that increase, but do not decrease, payment under the written contract” from the statutory definition of a commission].Footnote 33
Labor Code, § 515.6 [“Section 510 shall not apply to any employee who is a licensed physician or surgeon, who is primarily engaged in duties that require licensure pursuant to Chapter 5 (commencing with Section 2000) of Division 2 of the Business and Professions Code, and whose hourly rate of pay is equal to or greater than fifty-five dollars ($55.00). The department shall adjust this threshold rate of pay each October 1, to be effective the following January 1, by an amount equal to the percentage increase in the California Consumer Price Index for Urban Wage Earners and Clerical Workers.”].Footnote 34
Labor Code, § 515.6, subd. (b).Footnote 35
Labor Code, § 515.5.Footnote 36
Labor Code, § 515.5, subd. (a)(1).Footnote 37
Labor Code, § 515.5, subd. (a)(1).Footnote 38
Labor Code, § 515.5, subd. (a)(3).Footnote 39
Labor Code, § 515.5, subds. (a)(2)(A)–(C).Footnote 40
Labor Code, § 515.5, subd. (a)(4).Footnote 41
Labor Code, § 515.5, subd. (a)(4).Footnote 42
Labor Code, § 515.8.Footnote 43
Cal. Code of Regs., tit. 8, §§ 11010–11170, subds. (1)(C).Footnote 44
Cal. Code of Regs., tit. 8, §§ 11010–11170, subds. (2)(M).Footnote 45
See, e.g., Cal. Code of Regs., tit. 8, § 11090 (3)(L).Footnote 46
Cal. Code of Regs., tit. 8, § 11090 (3)(L); 49 C.F.R. §§ 395.1–395.13; Cal. Code of Regs., tit. 13, § 1200, et seq.Footnote 47
See 49 C.F.R. §§ 395.1–395.13.Footnote 48
See Cal. Code of Regs., tit. 13, § 1200, et seq.; see also Collins v. Overnite Transp. Co. (2003) 105 Cal.App.4th 171, 175.Footnote 49
Labor Code, § 514.Footnote 50
Labor Code, § 514.Footnote 51
Labor Code, § 514.Footnote 52
Nordquist v. McGraw-Hill Broadcasting Co. (1995) 32 Cal.App.4th 555, 562 [“Exemptions are narrowly construed against the employer and their application is limited to those employees plainly and unmistakably within their terms.”].Footnote 53
Ramirez v. Yosemite Water Co., Inc. (1999) 20 Cal.4th 785, 794–795 [“[T]he assertion of an exemption from the overtime laws is considered to be an affirmative defense, and therefore the employer bears the burden of proving the *795 employee’s exemption.”].Footnote 54
Labor Code, §§ 204, 510, subd. (a) [“Eight hours of labor constitutes a day’s work. Any work in excess of eight hours in one workday and any work in excess of 40 hours in any one workweek and the first eight hours worked on the seventh day of work in any one workweek shall be compensated at the rate of no less than one and one-half times the regular rate of pay for an employee.”]; see also Labor Code, §§ 511, 514, 515.Footnote 55
Labor Code, §§ 204, 1194, subd. (a).Footnote 56
Labor Code, § 1194, subd. (a).Footnote 57
Labor Code, §§ 204, 210, 225.5.Footnote 58
Labor Code, §§ 210, 225.5; Labor Code, §§ 2698–2699.5.Footnote 59
Labor Code, § 512, subd. (a).Footnote 60
See, e.g., Cal. Code of Regs., tit. 8, §§ 11010–11150, subds. (11)(B).Footnote 61
Labor Code, § 226.7, subd. (c); Cal. Code of Regs., tit. 8, §§ 11010–11150, subds. (11)(B), (12)(B).Footnote 62
United Parcel Service, Inc. v. Superior Court (2011) 196 Cal.App.4th 57, 69.Footnote 63
Labor Code, § 226.Footnote 64
Labor Code, § 226, subd. (e)(1).Footnote 65
Labor Code, § 226, subd. (e)(1) [“An employee suffering injury as a result of a knowing and intentional failure by an employer to comply with subdivision (a) is entitled to recover the greater of all actual damages or fifty dollars ($50) for the initial pay period in which a violation occurs and one hundred dollars ($100) per employee for each violation in a subsequent pay period, not to exceed an aggregate penalty of four thousand dollars ($4,000), and is entitled to an award of costs and reasonable attorney’s fees.”].Footnote 66
Labor Code, § 203, subd. (a); see McLean v. State of California (2016) 1 Cal.5th 615, 619 [“An ’employer’ that ‘willfully fails to pay’ in accordance with sections 201 and 202 ‘any wages of an employee who is discharged or who quits’ is subject to so-called waiting-time penalties of up to 30 days’ wages.”].Footnote 67
See Reynolds v. Bement (2005) 36 Cal.4th 1075, 1084 [“The employee may seek judicial relief by filing an ordinary civil action against the employer for breach of contract and/or for the wages prescribed by statute. [Citations.] Or the employee may seek administrative relief by filing a wage claim with the commissioner pursuant to a special statutory scheme codified in [Labor Code] sections 98 to 98.8.”].Footnote 68
Labor Code, § 226.7; Code Civ. Proc., § 338; Murphy v. Kenneth Cole Productions, Inc. (2007) 40 Cal.4th 1094, 1110–1111.Footnote 69