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UPDATED (2019): A Hidden Trap With The New California Minimum Wage

UPDATED (2019): A Hidden Trap With The New California Minimum Wage

Every year I try to remind (and warn) employers that increases to the minimum wage result in more than adjustments to an hourly (non-exempt) employee’s pay. Here I go again…

If you’re an employer in California, you may know that the minimum wage increased on January 1, 2019 (to $11.00 per hour for employers with 25 or fewer employees, and to $12.00 per hour for employers with 26 or more employees). 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, 2019, you would have to pay your exempt employees an annual salary of at least $41,600 to satisfy the exemption tests. The math: 2080 x $10 x 2 = $41,600.
  • Commencing January 1, 2019, you have to pay your exempt employees an annual salary of:
  • $45,760 (25 or fewer employees) to satisfy the exemption tests. The math: 2080 x $11 x 2 = $45,760; or
  • $49,920 (26 or more employees) to satisfy the exemption tests. The math: 2080 x $12 x 2 = $49,920.
  • 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 stated above, 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 two (2) times the state minimum wage for full-time employment, I have an answer for you. In the eyes of the law, they may become non-exempt employees and may be 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.

Note: This article is not intended to provide legal advice.

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