Back in April, 2016, Governor Brown signed into law increases to California’s minimum wage regulations. This law implements annual increases to minimum wages until they reach $15/hour in 2022. Or for smaller entities, until 2023. Future increases will then be tied to the national Consumer Price Index for urban wage earners and clerical workers (CPI-W).
While we can debate the merits of this increase until we are blue in the face, all California businesses, organizations, agencies, and other entities still need to comply with it. There are a couple of built-in scenarios that could pause the increases on a temporary basis. That decision would be made in August on any given year. There’s no provision that would allow for a permanent halt to the increases.
So far, there’s no glimmer of hope of a grass-roots effort to make a change or any news from Sacramento that would indicate a change of heart. Recent reports show rural manufacturing numbers are trending down. Small businesses continue to struggle with the rising labor costs. The non-urban areas are starting to feel the pinch but the state doesn’t differentiate between urban and non-urban areas with the regulation.
So, what does this mean for you right now?
2019 INCREASE
Businesses with 26 or more employees – minimum wage increased to $12/hour. Smaller businesses with 25 or fewer employees – increased to $11/hour. Since the increase occurred on Jan. 1, 2019, if that was in the middle of your pay period, you had to either implement it early and cover the entire pay period with the increase or you paid two separate hourly rates for the pay period.
So, that’s it, right? Just increase the pay for California’s minimum wage and you’ll be fine. Well, hold on just a minute. There are two other important effects to consider.
EXEMPT SALARY THRESHOLD
First, remember non-exempt and exempt classifications are NOT how you pay employees. But those classifications DO impact how employees are paid. The exempt/non-exempt classification is based on two factors: salary threshold and duties test. Employees are often labeled as salaried or hourly but that might not reflect proper classification.
California employees are presumed to be non-exempt unless they meet both of the exemption criteria. The first is the salary threshold. The second is the duties test.
With California’s minimum wage increasing, the salary threshold also increases. The threshold is 2x the state minimum wage. Exempt employees in larger businesses must earn at least $49,970/year ($4160/month). Smaller businesses (25 or fewer employees) have a threshold of $45,760/year ($3813.33/month). Why don’t we just double the hourly rate? Because part of the exemption requirement states exempt employees must be paid on a monthly (or yearly) basis. Remember, exempt employees earn a salary for the week regardless of how many hours they work.
The second criteria is the duties test. So, after an employee meets the salary test, then we look at the job duties. First we review if they fall into one of the “columns” of work — Executive/Managerial/Supervisor, Professional, or Administrative. (Sales is its own category. Contact me if you have questions.)
If the employee fits in one of the columns, then we look at what duties they are performing. Are they customarily and regularly exercising discretion and independent judgment? Are they performing exempt level duties at least 51% of the time? It is a difficult standard to meet, especially for small businesses. Often the salary threshold will determine the exemption but if an employee meets the salary requirement, they still have to meet the duties test too.
2019 is a good time to review all your employees’ classifications and make sure they are correct. Need an audit? Schedule one here.
SALARY COMPRESSION
The other issue that you need to think about is the salary compression. Every time California’s minimum wage increases, the lower salaries in your business are compressed. While this isn’t a requirement to review, it is critical that you think about it. Salary compression is defined as: when there is only a small difference in pay between employees regardless of their skills or experience. With minimum wage increasing on an annual basis, employees who were making “close to minimum wage” are now making minimum wage. Positions that don’t require skilled employees may be filled with long-tenured employees who are still relatively low-paid.
For example, you have 10 employees and one is a clerk. She’s worked for you for 2 years and started at minimum wage. She’s received two $0.50 pay increases. In 2018, she was making $11/hour. But now with California’s minimum wage increase, she is earning minimum wage. If you decided to hire a new clerk, he/she would start at $11/hour. So your 2-year tenured employee is now disgruntled because she’s earning the same as a new hire. There aren’t any easy answers here. But this is something that is critical that you think about…especially with the annual increases continuing for another 3-4 years.
If you have questions, please contact me. I’d love to explore the implications and possibilities with you.