California’s employment laws divide employees into two main categories: exempt employees and nonexempt employees. The distinction can be important because nonexempt employees have more rights in the workplace than exempt employees.
Usually, employers prefer to classify employees as exempt. To do so, however, several requirements must first be met. This article explains those requirements, with a special focus on the minimum salary rule for exempt employees.
The Definition of “Exempt Employee” in California
Most California employees are entitled to certain important rights. Those include:
- The right to be paid at least the minimum wage;1
- The right to overtime wages when they work more than eight hours in a workday, more than 40 hours in a workweek, or seven consecutive days;2 and
- The right to meal and rest breaks when their shifts exceed a certain duration.3
Some employees, however, are exempt from some or all of these legal protections, as well as related laws.4 In most cases, there are three simple requirements to determine whether a worker is an exempt employee under state law:
- Minimum Salary. The employee must be paid a salary that is at least twice the state minimum wage for full-time employment.5
- White-Collar Duties. The employee’s primary duties must consist of administrative, executive, or professional tasks.6
- Independent Judgment. The employee’s job duties must involve the use of discretion and independent judgment.7
If all three requirements are met, the employee will usually be classified as “exempt” from overtime, minimum wage, and rest break requirements (but not meal break requirements).
The Requirement of a Salary Generally
Only employees who are paid a salary qualify as an exempt employee. Employees who are paid an hourly wage are not considered exempt.8
A salary, for these purposes, is a fixed minimum payment of wages that is paid regardless of hours worked or the amount or quality of work performed.9 Employees who are paid an hourly wage cannot be classified as exempt employees—even if their work consists primarily of job duties that would otherwise be considered exempt.
A salary that is tied to the number of hours worked, with no minimum guarantee, is treated as the payment of hourly wages and will not satisfy the exemption’s salary requirement.10
The Minimum Required Salary Amount
To meet the salary test, an employee must be paid a monthly salary that is at least twice the state minimum wage for full-time employment.11
“Full-time employment,” for these purposes, is defined as 40 hours per week.12 And the phrase “monthly salary” refers to the amount of wages paid in a month, not to the frequency of payment—most employees are entitled to be paid twice a month.13
In 2018, people that work for an employer with 25 or fewer employees are entitled to be paid a minimum wage of at least $10.50 per hour. People that work for an employer with more than 25 employees are entitled to be paid a minimum wage of at least $11.00 per hour.14
This means that the minimum salary for exempt employees in 2018 is either:
- $3,640.00 per month (or $43,680.00 annually) if the employee works for an employer of 25 or fewer people, or
- $3,813.33 per month (or $45,760.00 annually) if the employee works for an employer of more than 25 people.15
These numbers are calculated by doubling the applicable minimum wage, multiplying that amount by 40 hours per week, the result of which is then multiplied by 52 weeks and divided by 12 months. This calculation gives us a monthly salary that is equal to twice the state minimum wage for full-time employment.16
Importantly, California’s minimum wage is set to increase every year on January 1st until 2023. This means that the minimum salary for exempt employees in California will also be increasing annually.
For more information about California’s minimum wage, please read our article: Guide to California’s Minimum Wage Laws in 2018 and Beyond.
Disciplinary Salary Deductions
Under federal law, docking an employee’s salary as a disciplinary action may nullify an employer’s classification of the employee as exempt.17
In California, however, “docking” a salary as a disciplinary action should never happen. “Docking” wages for disciplinary reasons is contrary to California’s policy that an employer must pay, without deduction except for those authorized by law, the full wages an employee has earned.18
On the other hand, docking a salary for missing full days of work due to a disciplinary suspension will not cause a loss of exempt status unless the remaining salary earned during the month in which the deduction was made causes the monthly salary to fall below the threshold required for exempt employee status.19
Salary Deductions for Absences
In calculating an employee’s salary for the purposes of the salary test for exempt employees, employers are permitted to deduct any unpaid vacation days or personal days that are taken by the employee.20 Importantly, however, the deductions must reflect a full day of pay due to absence from work.
When deductions are made from a salary for missing less than a full of work, the employee cannot be classified as exempt. Docking an employee’s pay for missing less than a full day of work amounts to treating the employee as an hourly employee, rather than a salaried employee.21
Requiring exempt employees to use annual vacation or leave time when they miss work, even if they are absent for only part of a day, will not usually affect an employee’s exempt status.22 When leave or vacation time has been exhausted, however, deducting pay for missing a partial day of work would require the employer to treat the employee as nonexempt.
Potential Changes in Federal Exemption Laws
Many websites are incorrectly reporting that the minimum salary of exempt employees has increased to $47,892.00 per year. As this section will explain, they are relying on a federal regulation that has been blocked by the courts. Until the courts let the regulation take effect, the minimum salary amount mentioned in Chapter 3 remains in force for California employees.
On March 23, 2014, President Obama issued a memorandum directing the Secretary of Labor to “modernize and streamline the existing overtime regulations for executive, administrative, and professional employees.”23
In response, the Department of Labor published new regulations that would have increased the minimum salary level for exempt employees to $921.00 per week (or $47,892.00 annually).24 The regulations would also have instituted regular increases in the minimum salary amount every three years.25
On August 31, 2017, the same court found that the Department of Labor had “exceeded its authority and gone too far” with the new minimum salary requirements. It therefore held that the new rules were invalid and could not take effect.28 The case was then appealed to the United States Court of Appeals for the Fifth Circuit, where it is currently pending.29
The Department of Labor has since suggested it may reassess what the minimum salary level should be, while the courts figure out whether its previous rule was legal. In the meantime though, it does not appear that the increased salary amount will take effect. The current minimum annual salary for most exempt California employees remains at $43,680.00 or $45,760.00, depending on the size of the employer.30
Notably, if the rule fails to take effect before January 1, 2019, California’s minimum salary level for many exempt employees will surpass the proposed federal minimum salary, when the state minimum wage increases to $12.00 for employees of employers of 25 or more people.31 So, these potential changes could be rendered irrelevant for many California employees if the courts keep blocking them.
Labor Code § 1182.12.Footnote 1
Labor Code, § 510.Footnote 2
Labor Code, § 512, subd. (a); Cal. Code of Regs., tit. 8, §§ 11010–11170 [wage orders of the California Industrial Welfare Commission].Footnote 3
See, e.g., Cal. Code Regs., tit. 8, § 11010, subds. 3 [overtime], 4 [minimum wage], 5 [reporting time pay], & 12 [rest periods]. Subdivison 1(A) of that wage order provides that subdivisions 3 to 12 “shall not apply to persons employed in administrative, executive, or professional capacities.” California wage orders for most occupations contain similar exemptions.Footnote 4
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 5
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 6
Labor Code, § 515, subd. (a) [requiring employees to “customarily and regularly exercises discretion and independent judgment in performing” the duties of their job].Footnote 7
29 C.F.R. § 541.600(a) [“To qualify as an exempt executive, administrative or professional employee under section 13(a)(1) of the Act, an employee must be compensated on a salary basis at a rate of not less than $455 per week (or $380 per week, if employed in American Samoa by employers other than the Federal Government), exclusive of board, lodging or other facilities.”]; see also 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 8
See Negri v. Koning & Associates (2013) 216 Cal.App.4th 392, 397 [“A salary is generally understood to be a fixed rate of pay as distinguished from an hourly wage.”]; 29 C.F.R. § 541.602(a) [“An employee will be considered to be paid on a “salary basis” within the meaning of this part if the employee regularly receives each pay period on a weekly, or less frequent basis, a predetermined amount constituting all or part of the employee’s compensation, which amount is not subject to reduction because of variations in the quality or quantity of the work performed.”].Footnote 9
Negri v. Koning & Associates (2013) 216 Cal.App.4th 392, 399 [A salary must be “a predetermined amount that is not subject to reduction based upon the quantity or quality of work.”].Footnote 10
Labor Code, § 515(a).Footnote 11
Labor Code, § 515, subd. (c) [“For the purposes of subdivision (a), ‘full-time employment’ means employment in which an employee is employed for 40 hours per week”].Footnote 12
Labor Code, § 204, subd. (a) [“All wages, other than those mentioned in Section 201, 201.3, 202, 204.1, or 204.2, earned by any person in any employment are due and payable twice during each calendar month, on days designated in advance by the employer as the regular paydays.”].Footnote 13
Labor Code § 1182.12, subd. (b). The minimum wage applies to “all industries” and to “any occupation” except outside salespersons and individuals participating in certain national service programs. (Labor Code, §§ 1171, 1182.12.)Footnote 14
Labor Code, §§ 515, subd. (a), 1182.12.Footnote 15
Labor Code § 515(a).Footnote 16
Auer v. Robbins (1997) 519 U.S. 452, 456 [117 S.Ct. 905, 909] [adopting Labor Secretary’s view that “employees whose pay is adjusted for disciplinary reasons do not deserve exempt status because as a general matter true ‘executive, administrative, or professional’ employees are not ‘disciplined’ by piecemeal deductions from their pay, but are terminated, demoted, or given restricted assignments”].Footnote 17
See, e.g., Prachasaisoradej v. Ralphs Grocery Co., Inc. (2007) 42 Cal.4th 217, 231 [“the public policy of special protection for wages generally had been expressed in numerous statutes and decisions that required the prompt and full payment of wages due, as the employee’s exclusive property”].Footnote 18
See Dept. Industrial Relations, DLSE Opn. Letter No. 2002.05.06 (May 6, 2002), available here. This interpretation of California law differs from the federal rule, which permits deductions from pay of exempt employees if they are “made for unpaid disciplinary suspensions of one or more full days imposed in good faith for infractions of workplace conduct rules” and are “imposed pursuant to a written policy applicable to all employees.” 29 C.F.R. § 541.602(a)(5).Footnote 19
Conley v. Pacific Gas & Elec. Co. (2005) 131 Cal.App.4th 260, 266–267 [following 29 C.F.R. § 541.602(b)(1), which provides that “[d]eductions from pay may be made when an exempt employee is absent from work for one or more full days for personal reasons, other than sickness or disability”]. Federal law provides that deductions from pay for full days of sickness or disability will not affect the exemption if the employer has a plan in place that compensates the employee “for loss of salary occasioned by such sickness or disability,” or if the employee has not yet qualified for the plan or has exhausted its benefits. (29 C.F.R. § 541.602(b)(2).)Footnote 20
Conley v. Pacific Gas & Electric 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 21
Rhea v. General Atomics (2014) 227 Cal.App.4th 1560, 1569.Footnote 22
Updating and Modernizing Overtime Regulations (Mar. 13, 2014) 79 Fed. Reg. 18737, 18737.Footnote 23
29 C.F.R. § 541.600(a) [“To qualify as an exempt executive, administrative or professional employee under section 13(a)(1) of the Act, an employee must be compensated on a salary basis at a rate per week of not less than the 40th percentile of weekly earnings of full-time nonhourly workers in the lowest-wage Census Region. As of December 1, 2016, and until a new rate is published in the Federal Register by the Secretary, such an employee must be compensated on a salary basis at a rate per week of not less than $ 913 (or $ 767 per week, if employed in American Samoa by employers other than the Federal government), exclusive of board, lodging or other facilities.”].Footnote 24
29 C.F.R. § 541.600(a) [“Beginning January 1, 2020, and every three years thereafter, the Secretary shall update the required salary amount pursuant to § 541.607. Administrative and professional employees may also be paid on a fee basis, as defined in § 541.605.”].Footnote 25
29 C.F.R. § 541.600(a); Nevada v. United States DOL (E.D.Tex. 2016) 218 F. Supp. 3d 520, 525 [“Effective December 1, 2016, the Final Rule will increase the minimum salary level for exempt employees from $455 per week ($23,660 annually) to $921 per week ($47,892 annually). The new salary level is based upon the 40th percentile of weekly earnings of full-time salaried workers in the lowest wage region of the country, which is currently the South. The Final Rule also establishes an automatic updating mechanism that adjusts the minimum salary level every three years. The first automatic increase will occur on January 1, 2020.”].Footnote 26
Nevada v. United States DOL (E.D.Tex. 2016) 218 F. Supp. 3d 520, 534 [“[T]he Department’s Final Rule described at 81 Fed. Reg. 32,391 is hereby enjoined. Specifically, Defendants are enjoined from implementing and enforcing the following regulations as amended by 81 Fed. Reg. 32,391; 29 C.F.R. §§ 541.100, 541.200, 541.204, 541.300, 541.400, 541.600, 541.602, 541.604, 541.605, and 541.607 pending further order of this Court.”].Footnote 27
Nevada v. United States DOL (E.D.Tex. Aug. 31, 2017, Civil Action No. 4:16-CV-731) 2017 U.S.Dist.LEXIS 140522, at *27–*28.Footnote 28
See Wage & Hour Div., Important information regarding recent overtime litigation in the U.S. District Court of Eastern District of Texas (2017), available here.Footnote 29
Labor Code, §§ 515, subd. (a), 1182.12.Footnote 30
Labor Code § 1182.12, subd. (b).Footnote 31