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A Hidden Trap With The New $10 Minimum Wage

A Hidden Trap With The New $10 Minimum Wage

If you’re an employer in California, you may know that the minimum wage increased on January 1, 2016 (from $9 to $10 per hour). If not, you do now! But that’s not why I am writing this article.

Rather, I want to alert you to a hidden trap that could get you (and your business) in trouble with your exempt employees (generally those who are paid a salary and satisfy the exemption tests under California law). These are employees who are exempt from overtime compensation and other entitlements that are generally afforded to non-exempt (e.g., hourly) employees.

The exemption tests – which are used by experienced labor and employment attorneys to determine exempt versus non-exempt classification – are complicated and exceed the scope of this article.
Now, getting back to the hidden trap: If you have exempt employees (and most of you do) one element of the primary exemption tests is that the employee “earn a monthly salary equivalent to no less than two (2) times the state minimum wage for full-time employment.”

Some of you may have spotted the trap. If not, here it is in plain English:

Full-time employment is 2080 hours per year.
Pre-January 1, 2016, you would have to pay your exempt employees an annual salary of at least $37,440 (or ~$3,120 per month) to satisfy the exemption tests. The math: 2080 x $9 x 2 = $37,440.
Commencing January 1, 2016, you have to pay your exempt employees an annual salary of at least $41,600 (or ~$3,467 per month) to satisfy the exemption tests. The math: 2080 x $10 x 2 = $41,600.
In other words, not only did some of your non-exempt hourly employees receive a raise on January 1st, but if you have exempt employees who are earning less than $41,600 (or ~$3,467 per month) they must receive a raise as well.

If you’re wondering what will happen if you do not pay your exempt employees an annual salary of at least $41,600 (or ~$3,467 per month), I have an answer for you. In the eyes of the law, they will become non-exempt employees and will entitled to overtime compensation and other entitlements that are generally afforded to non-exempt employees. This is called “misclassification.” And the consequences associated with misclassification are…well…no need to end on a negative note.

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