By Michele Haydel Gehrke
On April 4, 2016, California Governor Jerry Brown signed into law a bill that will increase California’s minimum wage statewide to $15 per hour by 2022. The Governor and Legislature reached a compromise deal in recent weeks to thwart a scheduled ballot initiative that threatened a more aggressive increase to the state’s minimum wage.
The new law gives the Governor discretion to delay the scheduled minimum wage increases for one year if there is an economic downturn or budget shortfall. It also gives businesses with fewer than 26 workers an extra year to comply with the wage increase.
The current $10 per hour minimum wage will increase according to the following schedule (if no increases are delayed by the Governor):
$10.50 per hour on January 1, 2017, for large businesses (January 1, 2018, for smaller employers with 25 employees or less);
$11 per hour on January 1, 2018, for large businesses (January 1, 2019, for smaller employers);
$12 per hour on January 1, 2019, for large businesses (January 1, 2020, for smaller employers);
$13 per hour on January 1, 2020, for large businesses (January 1, 2021, for smaller employers);
$14 per hour on January 1, 2021, for large businesses (January 1, 2022, for smaller employers);
$15 per hour on January 1, 2022, for large businesses (January 1, 2023, for smaller employers);
Future wage increases will be tied to inflation as measured by the national Consumer Price Index, up to 3.5% per year and rounded to the nearest 10 cents.
The law also provides for In-Home Supportive Services employees to receive up to three days of paid sick leave annually on a phased-in schedule beginning in July 2018: one sick day in July 2018, a second day when minimum wage hits $13 per hour, and a third day when minimum wage reaches $15 per hour.
While several municipalities have passed legislation increasing the minimum wage in recent years to offset higher costs of living, the new law will take effect statewide. California is the first state in the nation to pass such a minimum wage, in response to a growing demand to improve working conditions for low-income workers.
However, the law will affect not only those earning minimum wage, but also those employees who may currently be exempt from overtime under state law. Currently, to be exempt from overtime under California law, employees must not only perform exempt duties but also must earn at least two times the state minimum wage for full-time employment. With the current $10 minimum wage, that calculates to a salary of at least $41,600. With each increase in minimum wage, the minimum salary amount for exemptions will similarly increase—for example, with the increase in minimum wage to $10.50, the exempt level will increase to $43,680. Once the full $15 minimum wage is phased-in, the minimum salary for an exempt employee in California will need to be at least $62,400. If the salaries of exempt employees do not keep pace with the minimum wage increases, then more employees will fall below the salary threshold and need to be reclassified as non-exempt and eligible for overtime, meal and rest breaks, and other protections under California’s wage and hour laws.
Similarly, minimum wage also affects commissioned sales employees who must earn 1.5 times the state minimum wage and more than half their income from commission. The increase in minimum wage will increase the amount of income these employees must earn to be classified as exempt.
Because of these changes, it is recommended that well before the end of the year, employers with employees in California look closely at their compensation practices to make adjustments to pay as needed to comply with the new law, not only for low-income workers but also the exempt workforce.
For further guidance on these issues, contact the author or your Polsinelli lawyer.