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California’s Minimum Wage Increase, Effective July 1, 2014, May Potentially Impact Your Business’s Exempt and Non-Exempt Employees

backdrop-72176_640.jpgBy the year 2016, California’s minimum wage will increase from $8 per hour to $10 per hour. More specifically, pursuant to AB 10, effective July 1, 2014, the California minimum wage will increase from $8 to $9 per hour. The minimum wage will then increase again to $10 per hour effective January 1, 2016. This 25% rise in the minimum wage is the first minimum wage hike in California in 5 years. Despite opposition from many business groups, some of which argued that the wage increase would result in a loss of thousands of jobs, the bill was passed by the California legislature on September 12, 2013, and signed into law by Governor Jerry Brown on September 25, 2013.

California is one of 18 states and the District of Columbia that have minimum wages above the federal minimum of $7.25 per hour. According to a review of U.S. census data carried out by the Sacramento Bee, AB 10 is expected to affect about 1.5 million full-time, year-round workers, accounting for approximately 14% of the state’s full-time workforce. Even though a provision that provided for automatic adjustments to the State’s minimum wage based on cost of living was eliminated from an earlier version of the bill, proponents of the bill argue that workers will now spend more, stimulating the economy.

How might this wage increase affect your business?

Changes in the California minimum wage will not only affect the minimum wage a company must pay its non-exempt employees, but it will also affect whether the company is paying its employees high enough compensation to meet the salary-basis test of the overtime exemptions (executive, administrative, or professional) under California law. Exempt employees in California must generally earn a minimum monthly salary of no less than two times the state minimum wage for full-time employment (40 hours per week). Notably, paying an employee this minimum salary will not automatically qualify the employee as exempt from overtime. However, this criterion must be met in order to preserve an employee’s exempt status. If an employee’s exempt status is not preserved, an employer may be liable for misclassification, which may open a company up to lawsuits for misclassification and unpaid overtime, as well as compensation for missed meal periods and rest breaks.

Currently, in order to preserve exempt status in California, supervisors are paid a little over $33,280 per year (or $2,773.33 per month). After July 1, 2014, however, the minimum monthly salary required to preserve exempt status will rise to $3,120 per month, or $37,440 annually. Yet, since the new minimum wage does not becomes effective until the middle of next year, it may be challenging for businesses to determine an employee’s yearly salary, while also ensuring proper compliance with the wage increase. By January 1, 2016, exempt employees will have to be paid at least $41,600 annually, or $20 per hour.

It is also important to monitor the municipalities that have the “living wage” ordinance, as the minimum wage in these locales may not wait until July 1, 2014, to increase the wage. Among those cities in the Bay Area in which the minimum wage is already higher than $9 per hour for certain employers are San Francisco ($10.55 per hour) and San Jose (currently $10 per hour, will increase to $10.15 per hour effective January 1, 2014).

All employers should review their compensation practices before AB 10 goes into effect on July 1, 2014, to ensure compliance with applicable California law. If you have any questions or concerns about AB 10, and how it potentially impacts your business, please do not hesitate to contact the Bay Area business and commercial lawyers at the Law Offices of James G. Schwartz P.C.

Sources:

California Legislature approves raising minimum wage to $10, by Marc Lifsher, Los Angeles Times

Jerry Brown signs bill to raise California minimum wage, The Sacramento Bee