Are Your Employees Properly Classified As Exempt or Non-Exempt? Updates to Overtime Pay

An organization’s culture is largely driven by managers.  Who do you choose to lead in your organization? If you are focusing efforts in having a sustainable engaged workforce, having the right managers in place is key. We often see some foundational issues with the classification of these managers OR the leeway these managers are given in classifying their direct reports.  In either case, organizational leaders need to be well aware of classification issues.  The following article was contributed by  Wu Castillo, P.C. – A law firm providing advice and representation for California employers.

Will You Be Compliant With The Final Federal Rule On December 1, 2016?


HOT OFF THE PRESS!  On May 18th, 2016, President Obama and Secretary Perez announced the publication of the U.S. Department of Labor’s Final Rule governing overtime pay and exemptions.

As discussed below, the Final Rule significantly changes federal requirements for exempt and overtime pay.  While the Final Rule does not change the “duties prong” of the exemption test, now is the best time to ensure you comply with the intricate web of exemption requirements.

Complying with overtime exemption requirements can be tricky and can lead to many legal claims against employers, whether through a government agency audit or because a current or former employee files a claim.

Employers often think that if an employee is paid at least double the California minimum wage, then that employee is automatically exempt.  Alternatively, some employers assume that if an employee primarily performs “exempt” duties, then a fairly generous salary will ensure exemption status.

Both of these assumptions are dangerous and can lead to substantial exposure for the employer.

Under both Federal and California law, the test for overtime exemption consists of two prongs: salary and duties.


The Salary Basis Test

To satisfy the salary prong, exempt employees in California generally must earn a minimum monthly salary of no less than two times the state minimum wage for full-time employment (with the exception of (1) computer professionals – who must earn at least $41.85 per hour or a yearly salary of $87,185.14 in 2016, and (2) certain commissioned salespersons, and a few other professions).

California’s current minimum wage is $10.00/hr.  Thus, a California exempt employee must earn at least $41,600.00 per year.  While California has historically been more generous on this front than Federal law, a significant change is coming December 1, 2016 courtesy of Federal requirements.


The NEW Federal Final Rule

On May 18, 2016, President Obama and U.S. Labor Secretary Thomas E. Perez announced the publication of the U.S. Department of Labor’s Final Rule. The Final Rule requires that exempt employees be paid at least $ $47,476.00 per year starting December 1, 2016.

The Final Rule also sets the total annual compensation requirement for highly compensated employees subject to a minimal duties test from $100,000 to $134,004 per year, and establishes a mechanism for automatically updating the salary and compensation levels every three years.

For the first time, the Final Rule permits employers to count nondiscretionary bonuses, incentives, and commissions toward up to 10 percent of the required salary level for the standard exemption, so long as employers pay those amounts on a quarterly or more frequent basis.


California employers would need to comply with both California and Federal requirements (whichever is more favorable to employees).  


The Final Rule goes into effect December 1, 2016, and employers must comply with the new salary rates starting on that date.  Future automatic updates to the new thresholds will occur every three years, beginning on January 1, 2020.  Click here to read the U.S. Department of Labor’s “Questions and Answers” regarding the Final Rule.


The Duties Test

Generally, to satisfy the “duties” prong under both California and Federal law, exempt employees must be “primarily engaged in” exempt activities while at work.  The phrase “primarily engaged in” means that more than 50% of the employee’s work time must be spent engaged in exempt work.

The primary allowable exemptions are: (1) Executive/Managerial; (2) Administrative; (3) Computer Professional; (4) Learned Professional; (5) Creative Professional; (6) Outside Salesperson; and (7) Inside Salesperson (with additional restrictions).

While the duties tests for each of these exemptions vary, they all require that the exempt-status employee perform high-level work that a typical hourly employee does not engage in, such as: the ability to make financial decisions for the employer, the ability to hire/fire employees, inventing, designing computer programs, exercising discretion and independent judgment, etc.


Misclassification Can Lead To Significant Exposure

Having an employee “misclassified” as exempt when the employee does not meet the two-part test above, can devastate an employer.  Employees, including former employees going back at least three years, can bring legal claims including unpaid overtime, missed meal and rest breaks, itemized wage statement violations, and waiting time penalties, per employee.

Additionally, the employer may also be sued via a purported class action, and/or a collective action under the Private Attorneys General Act.



Some possible tasks for employers to perform to gauge compliance with exemption requirements, include: conducting an internal audit.

First, evaluate whether each exempt employee meets the salary test for exemption (noting the different salary requirements for computer professionals, commissioned salespersons, and other special professions).

Second, review current job descriptions, and actual minute-by-minute job tasks performed by exempt employees and analyze whether each exempt employee is “primarily engaged in” exempt work duties for at least 50% of their work time.  If an employer does not currently have job descriptions, consider developing them, ensuring that the employee actually engages “primarily in” exempt tasks.

Also consider updating Employee Handbooks to clearly define “exempt” and “non-exempt.”

Finally, take steps to prepare for the increase in salary requirements set forth in the Final Rule and execute the changes by December 1, 2016.



DISCLAIMER:  Information provided on this website is not legal advice, and it does not create an attorney-client relationship with Wu Castillo, P.C., nor should you act on anything stated in this article without conferring with the Author or other legal counsel regarding your specific situation.

By | 2017-04-27T15:47:19-07:00 May 26th, 2016|News|