April showers brings May flowers…or so goes the saying. For California employers, April showers brought a May deluge. On April 4, 2016, California Governor Jerry Brown signed legislation to raise the statewide minimum wage, over time, to $15 an hour. In May, the federal Department of Labor (DOL) issued a new rule that all employers must increase the salary level from $23,660 per year to $47,476 per year if they want to maintain the exempt status of certain employees. The new rule goes into effect on December 1, 2016. To read more about the tidal wave of wage legislation, read an article written by my colleague David Goldman.
You probably already heard about both these new changes but what does this mean for the construction industry in California? In short, your costs of labor will increase in the next five (5) years by at least $21,000 per exempt employee!
Who is Exempt?
First, “exempt” means a worker who is not entitled to overtime compensation and other rights afforded to non-exempt, hourly employees which in California are many. As a disclaimer, this article focuses only on the minimum salary an employer must pay an exempt employee. There are tests under both federal and California law that an employee must meet to be truly exempt, depending on the basis for the exemption. For a list of exemptions recognized under California law see here or you may wish to speak to an employment attorney.
According to the National Association of Home Builders’ economists, more than 110,000 construction supervisors would no longer be eligible for the exemption. According to the NAHB data, California, Florida, North Carolina and Texas appear to be the states with the largest number of supervisors affected. The White House estimates that 392,084 California workers, who are currently classified as exempt employees, will be eligible for overtime under the DOL’s new regulations.
California employers in the construction industry will need to make some decisions to control their labor costs in the next five (5) years. Should you:
- Simply convert your exempt employees to hourly employees and
(a) pay the overtime worked by them or
(b) limit the workdays to no more than 8 hours per day and limit the workweeks to no more than 40 hours per week?
- Raise the salary of those exempt employees to comply with the December 1, 2016 deadline and keep raising it to comply with the California minimum salary requirement?
Let’s look at a pretend company, ABC Construction Company, who employs John Doe.
Keeping Your Employees Exempt Under the Law
John Doe works for ABC Construction Company (a pretend company) as a superintendent. This year, John’s salary was increased to $41,600 per year to comply with California law. You want to keep John as a salaried, exempt employee. You will need to increase John’s salary by $5,876 per year by December 1, 2016 to comply with federal law.
On January 1, 2019, you will again have to increase John’s salary by another $2,444 to keep John exempt under California law. By January 1, 2022, John’s salary will be $62,400 to keep up with California law.
Between January 1, 2016 to January 1, 2022, John’s salary will have increased by a total of $20,800 to keep him exempt under both California and federal law!
Converting Current Exempt Employees to Hourly Employees
Under this scenario, you decide to convert John into an hourly employee. Your newly converted hourly employees like John should:
- Receive the Notice to Employees required by Labor Code section 2810.5(b). Section 2810.5 requires that the employer notify the employee in writing of any changes to the information set forth in the notice within seven (7) calendar days after the time of the changes;
- Record all hours worked, including (possibly) any travel time, by using time cards or timesheets;
- Receive payment for overtime after 8 hours in a workday or 40 hours in a workweek; and,
- Receive a 10-minute rest break and 30-minute meal break and any applicable premiums.
The decision to keep the exempt status or convert an employee to an hourly rate will likely entail a case-by-case determination of each affected individual’s duties, ongoing projects, and future projects. If your business lacks qualified human resources personnel, consider consulting an employment attorney in making this determination to ensure compliance with both state and federal wage and hour laws.