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Your Legal Corner - Client Alert Blog

New Guaranteed Minimum Salary Basis Test For California Overtime Pay Exemptions

Written By: Melissa C. Marsh, Esq., California Attorney, February 2014 Add to Favorites

As of August 2013, to be exempt from overtime under the California executive, administrative, learned professional, creative professional, and inside sales exemptions in California the employee MUST be paid a "guaranteed minimum salary" of at least twice the minimum wage. In Negri v. Koning & Assoc., ___ Cal.App.4th ___ (May 16, 2013), the Sixth District Court of Appeals held that even where an employer pays an employee well over twice the minimum wage on an hourly basis and even where the employer never paid the employee less than twice the minimum wage in any given day, or pay period, the employee will be entitled to overtime if the employee was paid on an hourly basis. In other words, compensation based solely upon hours, with no guaranteed minimum, is not a salary. According to the Court, the salary requirement "is generally understood to be a fixed rate of pay as distinguished from an hourly wage. Thus, use of the word ‘salary' implies that an exempt employee's pay must be something other than an hourly wage ….," In Negi, the plaintiff was an insurance adjuster who was paid $29 per hour for his work. He did not have any guaranteed and predetermined minimum salary but in actual practice, the plaintiff always worked at least 40 hours per week and was always paid $29 per hour for each of those hours worked (and more if he worked more than 40 hours). Thus, the employee's total compensation each week was far more than twice the minimum wage (the minimum threshold compensation requirement to qualify as exempt from overtime pay in California). The highly paid employee nevertheless sued his employer, claiming he was improperly classified as exempt from overtime pay. The employer argued that the employee was properly classified as exempt from overtime pay because: (1) he met all of the requirements under the job duties test; and (2) he was a highly compensated employee earning $29 per hour, he was never paid for less than 40 hours in any workweek, and in fact he worked substantially the same number of hours (average of 60) each week. The trial court ruled in favor of the employer. The employee appealed and the appellate court reversed. According to the California Court of Appeals the employee's compensation did NOT meet the salary basis test necessary to be exempt from overtime status. The court explained that payment on a salary basis requires that an employee be paid a guaranteed predetermined amount (of at least twice the minimum wagethat is not subject to reduction based on the quantity or quality of work. The Sixth District Court of Appeals rejected the employer's argument that " ‘some sort of reduction in workload' must actually occur in order for an employee to lose his exemption." According to the Court, the fact that the employee never took any time off of work and was always paid for at least 40 hours of work per week was immaterial. According to the Court, there must be a guaranteed minimum salary in place for an employee to be deemed paid on a salary basis and to qualify for exempt from overtime status. The court did however clarify that am employer may increase an overtime exempt employee's pay without destroying exempt status, so long as there is a guaranteed minimum salary that meets the overtime pay exemption already in place. See, Kennedy v. Commonwealth Edison Co., 410 F.3d 365, 371b (7th Cir. 2005)),

"We recognize that, in practice, defendant always paid plaintiff the equivalent $29 per hour for 40 hours per week so that he, in effect, received an unvarying minimum amount of pay. We also recognize that, as a general matter, an exempt employee may be paid extra for extra work without losing the exemption. (See Kennedy, supra, 410 F.3d at p. 371.) The problem here is that defendant stipulated to the fact that it “never paid [plaintiff] a guaranteed salary”; if he worked fewer claims “he made less money than if he worked more claims.” That is the same thing as saying that plaintiff was not paid “a predetermined amount” that “was not subject to reduction based upon the quantity of work performed.” He was not paid a salary. For that reason, defendant did not prove that the administrative exemption of Wage Order 4 applies in this case." Slip Op. at 8-9.

Although the case was appealed to the California Supreme Court, the California Supreme Court refused to hear the case on August 21, 2013. Consequently, Negri v. Koning & Assoc., ___ Cal.App.4th ___ (May 16, 2013) is citable.

All California employers must remain mindful of California's overtime pay laws. A California employee is not exempt from overtime merely because she or he is highly compensated, or merely because they have the title of "supervisor" or "manager." California's overtime pay exemptions fall into various classes based on the type of work performed by the employee (e.g., executive, professional, administrative, computer, or creative), and to be exempt not only must the actual duties performed by the employee must meet the requirements of that particular class, but the employee must also be paid a guaranteed minimum salary that is not subject to reduction based on the quality of the work, quantity of the work, or the number of hours worked.

Posted In: Employment Law News 

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Located in Los Angeles, California, the Law Office of Melissa C. Marsh handles business law and corporation law matters as a lawyer for clients throughout Los Angeles including Burbank, Sherman Oaks, Studio City, Valley Village, North Hollywood, Woodland Hills, Hollywood, West LA as well as Riverside County, San Fernando, Ventura County, and Santa Clarita. Attorney Melissa C. Marsh has considerable experience handling business matters both nationally and internationally. We routinely assist our clients with incorporation, forming a California corporation, forming a California llc, partnership, annual minutes, shareholder meetings, director meetings, getting a taxpayer ID number (EIN), buying a business, selling a business, commercial lease review, employee disputes, independent contractors, construction, and personal matters such as preparing a will, living trust, power of attorney, health care directive, and more.