Effective January 1, 2016, the minimum wage in California will increase to $10 per hour. However, for Los Angeles employers, the increase does not stop there. On June 13, 2015, Los Angeles Mayor Eric Garcetti signed a law requiring businesses to increase pay for minimum wage workers to $15 by 2020. The Los Angeles increase will be introduced over the next five years, with the first pay hike to $10.50 per hour taking effect on July 1, 2016.
As a result of this increase, employers should keep in mind several factors that are directly tied to the new minimum wage. Most noteworthy, the increased hourly rate directly impacts the compensation for certain state overtime exemptions. For example, overtime exemptions for executive and administrative employees require payment of a salary of at least two times the minimum wage for full time employment. Accordingly, effective January 1, 2016, these employees must make a minimum of $41,600 ((2 x $10/hr) x 40hrs x 52 weeks = $41,600) per year. Employers should note that an employee’s salary is only one part of the overtime determination. To be exempt, these types of employees must also perform certain exempt duties.
Similarly, the increase in minimum wage has a direct effect on the overtime exemption for inside commissioned salespersons. To satisfy this exemption, the employee’s regular rate of pay must exceed one and one-half times the applicable minimum wage ($15/hr effective January 2016) for every hour worked in a workweek in which overtime hours are worked, and more than half the employee’s total earnings in a representative period must consist of commissions. In light of recent California case law (e.g., Peabody v. Time Warner Cable, Inc. (2014) 59 Cal. 4th 662), many dealerships have introduced an hourly wage scheme in addition to commissions for inside sales staff. Employers should be aware that an increase in hourly wages will likely make it more difficult for sales employees to satisfy the overtime exemption, because the employee’s hourly rate must be low enough so that commissions still represent more than one-half of the employee’s total earnings. But as hourly wages increase, commissions will represent a lower percentage of the employee’s overall income; thereby, making this overtime exemption more difficult to achieve.
In light of the increase in minimum wage, it is important for California employers to review and amend their employee compensation agreements. For further information on the minimum wage increase and specific exemptions under California law, please contact an experienced wage and hour attorney.