William H. Truesdell, SPHR
How to Determine Who Must Be Paid Overtime In California
The Management Advantage, Inc.
Last updated: November 2, 2015
Based on the Fair Labor Standards Act (FLSA), the Industrial Welfare Commission (IWC) Orders, and AB 60, AB 10
PLEASE NOTE: This information is intended to be a brief summary of requirements for California employers. It is not intended to represent legal or other professional advice. If you have specific questions about computing overtime for your employees, please consult with your qualified advisors for proper legal and accounting guidance. This information is subject to change without notice at any time.
Overtime computations have always been a point of difficulty for California employers. For years, state regulations required paying daily overtime in addition to overtime for hours worked over 40 in a week. Then, the state legislature changed the law, eliminating daily overtime requirements. The political tide quickly shifted direction and A.B. 60 was passed to reinstate daily overtime requirements. Current daily overtime rules became effective again on January 1, 2001. On August 23, 2004, new overtime exemption categories called "White Collar Exemptions" were implemented as modifications to the federal Fair Labor Standards Act (FLSA). On January 1, 2007, a new category was added for physicians and surgeons.
It's not just the calculation of rates that has challenged employers, but the rules under which some people are entitled to overtime payment and some are not.
The California Labor Commissioner is charged with enforcing overtime payment regulations in the state. Any employee who believes he/she has not received proper pay treatment is welcome to file a complaint with the Labor Commissioner's office. Branches are located in many cities throughout California.
One business owner discovered the hard way that overtime rules are nothing to fool around with. He had employed a woman, whom we will call Martha, for the entire 12 years of the business' life. She had become a friend and supporter throughout that time. One day, for a reason he can't remember, he and Martha had a disagreement, which led to her resignation. Martha left her office supervisor job, taking her personal belongings with her. She also took the steno pad she used to log the hours she had worked each pay period during the previous six years. The owner had told her to keep track of the hours herself and he would give her time off to compensate for any overtime. Martha, as you can guess, filed a complaint alleging unpaid overtime hours. Her records were used to prove her position. The owner had no option but to write a check for $18,000, nearly half of it in penalties. If he had only understood the regulations and applied them he could have avoided the penalties.
Start with the premise that everyone you employ is entitled to payment for overtime worked.
There are many rules, based on the industry you are in, but the most common are these: Hours worked in excess of 8 in one day are paid at time and a half. Hours worked in excess of 40 in a week are paid at time and a half. Hours worked in excess of 12 in a day are paid at double time. If you have alternative work schedules, such as 10 or 12-hour shifts, you need to determine the rules which apply to your situation.
Some jobs are EXEMPT from these overtime payment requirements.
The rules governing exemptions are very narrowly interpreted by the Labor Commissioner and you should be careful not to apply them incorrectly. It could be an expensive mistake.
EXEMPT means the job is NOT subject to payment for overtime hours worked. Employer policy may elect to compensate incumbents in these jobs for their overtime, but there are no restrictions on rates used or quantity of hours paid to incumbents in exempt jobs.
Overtime requirements apply to the JOB not the EMPLOYEE. It is the responsibility content of the job that determines if incumbent employees must be paid for the overtime they work.
Special Note: The U.S. Department of Labor (DOL) has published proposed rules that would increase the federal requirement for salary to $970 a week ($50,440 annually) from the current $455 a week ($23,660 annually). The current federal exemption salary requirement is lower than California's requirement. However, if this proposal is finalized by the DOL, even California's requirement will become moot. There has been a great outpouring of response to the initial proposal during the public comment period which ended in September 2015. It is generally expected that the DOL will issue final regulations early in 2016 that will confirm these new salary requirement numbers. Be aware that if the requirements are changed, all employers will be responsible for modifying their classification of exempt jobs based on the new salary requirements.
There are nine categories of exemption from overtime requirements under the Fair Labor Standards Act (FLSA). California's Industrial Welfare Commission (IWC) Orders only recognize eight so far. The ninth was added by the U.S. Supreme Court's June 18, 2012 opinion that pharmaceutical sales representatives are exempt from overtime under FLSA.
1. Executive Exemption
- Receives at least two times the state's minimum wage as a salary for full-time employment. This is known as the "minimum salary level test." (See Footnote #1)
- The primary function of the job is management of the enterprise, or of a customarily recognized department or subdivision.
- The job regularly directs the work of two or more subordinate employees.
- Has the authority to hire, fire and give pay treatment, or recommend those things.
- Handles employee complaints and discipline.
- Devotes less than 50% of work time to activities other than managerial duties.
- Regularly and customarily exercises discretionary power.
- OR, owns at least a bona fide 20 percent equity interest in the enterprise and is actively engaged in its management. (29 CFR 541.114)
2. Learned Professional Exemption
- Primary duty of performing work requiring advanced knowledge in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction.
- In most cases, only licensed or certified occupations are exempt under state law. Those include: law, medicine, dentistry, optometry, architecture, engineering, teaching and accounting. Medicine includes physicians but not nurses. Pharmacists are no longer automatically considered exempt. They must meet the tests for administrative or executive exemption. Attorneys are exempt, but paralegals are not. Exempt accountants must be certified public accountants, not uncertified accountants. Licensed civil, mechanical and electrical engineers are exempt, but junior drafters or engineers are not.
- Wage Orders 1 (Manufacturing), 4 (Professional, Technical, Clerical, Mechanical and Similar Occupations), 5 (Public Housekeeping), 9 (Transportation) and 10 (Amusement and Recreation) allow for exemptions for jobs requiring learned professionals. For such treatment, the education required must be advanced, meaning the employee must have a degree or certificate requiring at least one year of specialized study in addition to completion of a four-year college course. The work must be of a nature that its product cannot be standardized based on hours of work, and the employee has considerable freedom of choice about how to carry out a task, which gives general control over hours of work. This requirement for creativity or intellectual application must apply more than 50% of the time.
- The minimum salary test is met. (See footnote #1)
3. Creative Professional Exemption
- Primary duty of performing work requiring invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor.
- The minimum salary test is met. (See footnote #1.)
4. Administrative Exemption
- Primary duty of performing office or non-manual work directly related to the management or general business operations of the employer or the employer's customers and ...
- Customarily and regularly exercises discretion and independent judgment in the performance of intellectual work which, in the context of an administrative function, is office or non-manual work directly related to management policies or the general business operations of the employer or the employer's customers.
- Regularly and directly assists a proprietor or an exempt administrator, or performs, under only general supervision, work along specialized or technical lines requiring special training, experience or knowledge, or executes special assignments and tasks under only general supervision.
- Devotes more than 50% of time to these activities.
- The minimum salary test is met. (See footnote #1)
5. Outside Sales Exemption
- Primary duty of making sales; or of obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer, and ...
- Incumbent is 18 years of age or older.
- Usually work away from the employer's place of business, selling tangible or intangible items.
- More than 50% of the time they are performing these outside sales duties.
Work under Wage Orders 4 (Professional, Technical, Clerical, Mechanical and Similar Occupations) or 7 (Mercantile Industry).
- Receive commission-based compensation.
On June 18, 2012, the U.S. Supreme Court issued its 5-4 ruling in Christopher v. SmithKline Beecham Corp., No 11-204. That decision says pharmaceutical sales representatives are exempt from overtime under the FLSA. It is not yet clear whether or not California will permit the same exemption. If it does not, then employees in the pharmaceutical sales representative category will need to be paid overtime if working in California. This is an evolving issue and one which requires you to discuss any decisions with your attorney before making changes.
6. Computer-Related Occupation Exemption (See Footnote #2)
A California law known as S.B. 88 (Labor Code Section 515.5) exempts jobs (not the incumbent) that meet several tests, including ...
- Commonly involves job titles such as computer programmer, systems analyst, computer systems analyst, computer programmer analyst, applications programmer, applications systems analyst, applications systems analyst/programmer/software engineer, software specialist, systems engineer and systems specialist.
- Primarily engaged in intellectual or creative work that requires the exercise of discretion and independent judgment.
- Highly skilled and proficient in the theoretical and practical application of highly specialized information to computer systems analysis, programming and software engineering.
- Paid at least $36.00 per hour as of 1/1/2008 (an amount which may be adjusted each year).
- Primarily engaged in one or more of the following duties:
- The application of systems analysis techniques and procedures (including consulting with users) to determine hardware, software or system functional specifications; or
- The design, development, documentation, analysis, creation, testing or modification of computer systems or programs (including protypes) based on and related to, user or system design specifications; or
- The design, documentation, testing, creation or modification of computer programs related to the design of software or hardware for computer operating systems.
- A combination of these duties, the performance of which requires the same level of skills.
7. Highly Compensated Jobs (Does not apply to non-public sector employees in California.)
- Any job guaranteed a total annual compensation of at least $100,000.
- If this job customarily and regularly performed one or more identifiable executive, administrative, or professional functions as described in those categories, the incumbent may be considered exempt.
- Excluded from this category are "blue collar" workers, police officers, fire fighters, paramedics, EMTs, and other first responders, no matter how much they are paid. This exclusion applies as long as the job doesn't meet the tests for executive, administrative, or professional exemption.
- Total annual compensation may include only base salary, commissions, non-discretionary bonuses, and other non-discretionary compensation.
- Total annual compensation may NOT include such things as
- Payments for medical insurance
- Payments for life insurance
- Matching 401(k) pension plan payments
- Contributions to retirement plans
- Costs of other fringe benefits
8. Physicians & Surgeons
- A licensed physician or surgeon who is primarily engaged in performing duties for which a medical license is required is exempt from overtime if that person is paid at least the minimum hourly rate set annually by the state.
- Minimum requirement equates to $76.24 per hour as of 1/1/2016.
If you have employees who perform exempt functions part of the time and non-exempt functions for the balance of the pay period, any time worked on non-exempt activities must be compensated for overtime if appropriate.
Seventh Workday Rules
A.B. 60 changed the way employers must treat overtime on the seventh day of the workweek. These new requirements were effective on January 1, 2000.
1. Employees must be paid time-and-one-half the regular rate of pay for the first eight hours worked on the seventh CONSECUTIVE day worked in a workweek.
2. Double time must be paid for all hours worked beyond eight on any seventh CONSECUTIVE day of a workweek. (The seventh day may or may not be the seventh consecutive day worked in the workweek.)
3. The part-time exemption in effect prior to December 31, 1999 has been eliminated. Now, part-time employees who work on the seventh consecutive day must be paid according to the new rules.
4. Workweeks remain constant. If the workweek runs from Sunday through Saturday, the seventh workday in the workweek will be Saturday.
Some General Overtime Rules for California Employers
1. Only straight-time hours apply toward computing overtime for hours worked in excess of 40 in a week. Daily overtime hours, paid at time-and-one-half the normal rate, do not count toward the 40-hour weekly limit.
2. Only work hours actually worked count toward overtime computation. Hours excluded from computation of overtime include: vacation, holidays, sick leave, jury duty, and other paid time that is not actually worked.
3. An employee's regular straight time rate of pay is used for calculating overtime pay. The regular rate must include commissions, production bonuses, piecework earnings and the value of meals and lodging. Not included in the regular rate are: gifts or awards; vacation, holiday, personal day, sick leave or split-shift pay; reimbursed expenses; discretionary bonuses; profit-sharing plans; benefit costs paid by employer such as health or accident insurance, life insurance, retirement plan contributions. Overtime pay is also excluded from computing the regular straight time rate.
Recommendations for California Employers
1. Have written job descriptions which specify exempt/non-exempt status.
2. Keep written time records for all non-exempt employees. Include start time, ending time and any un-paid mealtime for each workday.
3. Pay for all overtime worked according to IWC regulations.
4. Post the required IWC Order pertaining to your industry.
In the final analysis, the employer gets to decide whether or not to pay overtime to workers. That decision is open to review by the State Labor Commissioner's office if an employee complaint is filed. Sometimes, income tax audits will also raise the issue because of back pay awards to employees.
1. "Minimum Salary Test" The minimum salary level for exempt white collar employees according to A.B. 60 is "no less than two times the state minimum wage for full time employment." "White collar" exemptions refer to the executive, administrative, learned professional, creative professional, computer employee, and outside sales exemptions specified in the Fair Labor Standards Act (FLSA) as amended effective 8/23/2004. Computing the California minimum salary level for January 2016 we do the following: Current minimum wage = $10.00 per hour X 2,080 hours in a year = $20,800, multiplied by 2 times the minimum wage = $41,600 divided by 12 months = $3,466.67 per month minimum salary requirement for exemption status. Since that is higher than the $1,957.00 per month ($455.00 per week) required by the FLSA, California's minimum will be required for exemption of California jobs.
2. The old federal compensation test for this group of jobs was a pay rate at least 6.5 times the federal minimum wage. That has been replaced with a minimum hourly rate of $41.85 for California in 2016. (Labor Code Sections 515.5 and 1773.9) There is an annual salary requirement as of January 1, 2016, of $87,185.14 which must be paid at least once a month at the rate of $7,265.43/month. We suggest consulting your labor attorney before implementing this exemption.