California’s White-Collar Exemption Requirements: Compliance Tips

In determining which employees qualify for exemptions from overtime pay requirements, California employers have to keep in mind the differences in approach between the federal Fair Labor Standards Act (FLSA) and the California labor code and wage orders.

While both the FLSA and California law provide “white-collar” executive, administrative, and professional (EAP) exemptions for certain categories of workers, California has more stringent requirements to qualify for some of the exemptions.

To qualify for EAP exemptions from overtime under the FLSA, employees must meet the duties test and be paid a salary of at least the weekly threshold amount—which will increase to $844 ($43,888 annually) as of July 1, 2024, and then to $1,128 ($58,656 annually) effective Jan. 1, 2025. If they are paid less or do not meet the duties tests, they must be paid 1.5 times their regular hourly rate for hours worked over 40 in a workweek.

[Want to learn more? Attend the SHRM Annual Conference & Expo 2024 concurrent session “Wage and Hour Compliance: A DOL Update and Ways to Avoid Common FLSA Overtime Liability Land Mines.”]

To be considered exempt from overtime pay requirements under California law, as under the FLSA, an employee must satisfy three requirements—a salary minimum; a salary basis, which describes how an exempt employee is to be paid and what deductions are allowed; and a duties test. However, the specifics of these requirements differ under California and federal law.

The following three factors must all be met for an employee to be classified as exempt from overtime in California:

• California’s salary threshold for an EAP exemption is two times the state minimum wage, which is $16 per hour in 2024. Thus, the minimum exempt salary for 2024 is $66,560 a year. Any employee in California earning less than $66,560 cannot be considered an exempt employee.
• Being paid on a “salary basis” means an employee regularly receives a predetermined amount of compensation each pay period on a weekly, or less frequent, basis. The predetermined amount cannot be reduced because of variations in the quality or quantity of the employee’s work. The employer will lose the exemption if it has an “actual practice” of making improper deductions from salary. California’s salary basis requirements mirror those of the FLSA.
• An employee must be performing exempt-level work requiring the exercise of discretion and independent judgment for more than 50 percent of their work hours to meet the duties test in California. The exempt work requiring discretion and independent judgment must be a genuine primary duty and responsibility, not something random or occasional, to meet the duties test. In determining whether an employee satisfies the duties test, the actual work performed during the course of the workweek has to be examined. In addition, the amount of time the employee spends on such work, together with the employer’s realistic expectations and the requirements of the job, must be considered.

Complying with California’s Requirements

California’s minimum wage increases far more frequently than the federal minimum wage, so employees classified as exempt risk failing to continue to meet the state’s minimum salary requirement fairly often. To maintain their EAP exemptions, employers should pay particular attention to increases in the minimum wage and be prepared to raise the salaries of their exempt salaried employees with each increase, according to Michael Brewer, an attorney with Baker McKenzie in San Francisco, Los Angeles, and Palo Alto, Calif. Employers can avoid losing the exemption by creating a buffer—setting a minimum salary amount substantially above twice the state minimum wage, he said.

“And watch out for exemption-destroying deductions. If an employee is ready, willing, and able to work, deductions may not be made for time when work is unavailable,” he cautioned.

“Employers should be on the lookout for increases in the California minimum wage on or about Aug. 1 of each year,” said Kwan Park, a lawyer with Morrison Foerster in San Francisco, noting that the 2016 minimum wage bill SB 3 requires the California director of finance to calculate an adjusted minimum wage based on inflation by Aug. 1. If the minimum wage is increased, the minimum wage and the commensurate increase in the salary threshold for the EAP exemptions would take effect Jan. 1 of the following year.

Further, Park recommended that employers monitor the California $18 Minimum Wage Initiative currently under consideration. “It would be helpful to start preparing a game plan in the event the ballot passes this November. If passed, employers with 26 or more employees would have to implement a statewide minimum wage of $18 per hour, effective Jan. 1, 2025,” Park said.

Determining if the Quantitative Test Is Met

California’s strictly enforced requirement that an exempt employee spend more than 50 percent of their time performing exempt-level work requiring the exercise of discretion and independent judgment presents another pitfall for employers because it can be difficult to quantify.

In determining the percentage of time an employee spends engaged in exempt work, employers “need to examine what employees are actually doing on a workweek basis, together with their realistic expectations of the job, to determine whether the employee is spending one-half or more of their time engaged in exempt work,” Kwan noted. He offered several suggestions for how employers can ensure the quantitative test is satisfied, including having HR work with managers to review a list of exempt tasks for the positions at issue and determine how much time employees are spending on them or having HR review job descriptions, identify exempt and nonexempt tasks, and determine the time allocated to each task. 

Another option is to conduct a wage and hour audit, including the classification of exempt positions. “If an audit is conducted, employers should consider involving legal counsel to be able to invoke attorney-client privilege and the work product doctrine,” Kwan said. 

Having employees sign an attestation that they worked one-half or more of their time on exempt work may be an additional option, he said, noting that employers choosing this option should consult legal counsel due to the multiple considerations at play.

“Careful employers look beyond the job description and focus on actual tasks and responsibilities,” Brewer said, but added that many employers do not focus on how much time the employee spends performing exempt duties.

He suggested that employers concerned that their exempt employees are meeting the quantitative test should conduct audits: “Periodic audits with a focus on how exempt employees’ time is actually spent will reveal whether salaried exempt employees are actually spending over 50 percent of their time performing exempt duties.”

He noted that some positions are more likely to fail the duties test than others, such as an assistant manager who spends most of the day doing the same nonexempt tasks as the employees they supervise.

Industry-Specific Complications

Finally, the exemption landscape in California is further complicated this year by the adoption of new industry-specific minimum wages for fast-food restaurants and health care workers.

Employers trying to prepare for these changes can adjust pricing to reflect increased labor costs, Brewer said. Alternatively, many employers are looking to invest in technology with an eye toward automation and increased productivity, he said, while others are simply planning to employ fewer workers than they would have employed under a lower minimum wage.

“For employers with employees currently making less than the new salary thresholds for the EAP exemptions, we expect there will be some reclassifications,” Kwan said. Employers will want to carefully weigh the costs of reclassification, including the number of overtime hours the employees would spend if reclassified, when deciding whether to increase these employees’ salaries or reclassify them as nonexempt employees, he noted. Emphasizing the sensitive nature of such a change, Kwan concluded that employers should also be prepared to communicate clearly and thoughtfully with employees about any changes to their classification or salary.

Rosemarie Lally, J.D., is a freelance legal writer based in Washington, D.C.