Many businesses elect to pay certain employees a salary which meets or exceeds the United States Department of Labor’s (DOL) minimum salary, allowing such employees to be exempt from overtime compensation under the Fair Labor Standards Act (FLSA) (assuming other applicable criteria are also met).  Effective January 1, 2020, that minimum salary will increase from $23,660 to $35,568 per year.  While this increase is significantly more modest than the increase proposed by the previous administration (which would have raised the minimum salary to $47,476), employers should still take note of the increased amount to ensure their employees are all properly classified as exempt or non-exempt.

This exemption applies only to those employees who perform certain duties, e.g., professional, managerial, and/or administrative duties.  The FLSA provides specific tests for determining whether employees validly fall within these exempt statuses, as well as providing the other statuses which may allow an employee to be exempt.  The increased salary threshold does not change these tests, nor does it allow for more or less employees to qualify for the exemptions.

While the duty tests are unchanged, the new administration has added two components which will likely prove helpful to employers.  First, where previously, discretionary bonuses and incentives could not be counted toward the employee’s minimum salary, these amounts can now account for up to ten percent of the minimum salary.  Thus, an employer who pays its salespeople certain bonuses upon reaching benchmarks in selling may count at least a portion of those bonuses towards the salespeople’s minimum salary.

Second, in the event an employee’s total salary on the close of a 52 week period does not meet or exceed the new minimum salary amount, employers may make one additional payment within the following pay period (the first pay period of the following year) to make up for the shortcoming.  Importantly, this amount must be in conjunction with those wages actually due to the employee in the pay period, and this amount may not be counted as wages for the following year.

While this increase in minimum salary is less than expected, the impact on California employers is likely quite small.  This is because California employers are bound to the minimum salary which is more favorable to employees for state exemption purposes – meaning the higher state minimum salary.  Perhaps not surprisingly, California’s state minimum salary is much higher than the FLSA prescribes, even after the increase noted above.  In California, the minimum salary required in order for employers with more than 25 employees to classify those employees as exempt is $49,920.  The minimum salary for employers with 1 to 25 employees to do the same is $45,760. Also unsurprisingly, the duties test which provides which employees qualify for the professional, managerial, and/or administrative exemptions is much more stringent at the state level than that included in the FLSA.  Also unlike the FLSA, California does not allow any non-discretionary bonuses or incentives to be counted toward the minimum salary.

Employers would be well served to conduct an audit of their employees’ salaries (and job duties) to ensure employees are being properly classified as exempt or non-exempt. Some employers may choose to give raises to those employees who may no longer meet the minimum salary threshhold.  When in doubt, treating an employee as non-exempt is almost always the better course of action.  If you would like assistance in conducting this audit, or have any questions about these exemptions, contact Navigato & Battin.