CalChamber Advises U.S. Labor Department Not to Follow California Example for Overtime Exemptions

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The U.S. Department of Labor (DOL) should not adopt California’s quantitative approach to determining whether an employee is exempt from overtime pay requirements, the California Chamber of Commerce and a coalition of California employers said this month.

California’s approach to analyzing the duties of exempt employees has resulted in significant litigation that will undermine the stated intent of the proposed federal regulations to limit litigation, the CalChamber and coalition stated in comments submitted to the DOL on September 4.

The DOL also proposes to update the baseline salary level for overtime exemptions. Under the proposed rule, the salary threshold for an employee to be classified as exempt will be significantly higher, increasing from $455 a week to $970 per week ($50,440 annually), and automatically adjusted according to inflation.  This proposed increase would far exceed California’s salary basis for exempt employees which is currently $37,440 a year. Beginning January 1, 2016, the minimum annual salary requirement in California will rise to $41,600 when the state minimum wage increases to $10 per hour.

Quantitative Approach Boosts Litigation

Since the enactment of AB 60 in 2000 that enacted California’s quantitative duties test for employees classified under the executive, administrative and professional exemptions, the number of wage-and hour class action lawsuits in California, including the misclassification of employees, has soared.

Seyfarth Shaw’s 11th Annual Workplace Class Action Litigation Report, published in 2015, concludes: “[t]he most dominant trend has been a steep rise in the number of class action lawsuits filed in state courts alleging violations of California’s overtime laws or the California Labor Code and wage & hour regulations. This trend continued unabated in 2014. The rate of new case filings has continued to grow to the point where multiple class actions are filed in California every day.”

In order to avoid costly litigation regarding misclassification, California employers have reacted by reclassifying employees who truly are exempt as hourly employees, the coalition letter stated. The administrative burden of tracking hours worked, recording meal breaks, or calculating overtime, is significantly less than defending a class action lawsuit challenging the status of an employee as exempt.

While burdensome, this reaction by California employers has more significantly harmed employees as follows: (1) change of status from a salaried employee to an hourly employee; (2) potential loss of compensation as many California employers do not allow employees to work overtime, given California’s daily and weekly overtime compensation requirements; and (3) loss of flexibility to employees with regard to managing their work schedule and personal life.

Automatic Salary Adjustment

The coalition also urged the DOL to reject or remove any proposed automatic adjustment to exempt employees’ salary through the Consumer Price Index (CPI) or another mechanism.

Automatically indexing wages according to inflation has always been troubling to the business community because it fails to take into consideration other economic factors or cumulative costs to which employers may be subjected. Employers in California are already facing significant cost increases including implementing a paid sick leave mandate for all employees, the highest state income and sales taxes, the most expensive workers’ compensation costs, reduction in the federal unemployment insurance credit, and increased energy costs. There will undoubtedly be other costs employers are struggling with in the years following the DOL-sought increase to the federal salary basis test for exempt employees. These unknown costs, coupled with an unknown economy at the time of the proposed salary increase or thereafter, create concern and uncertainty for businesses.

If an employer is faced with an increasing salary minimum for exempt employees when the economy is suffering, the employer will be forced to take any cost-saving measures it can, including: (1) changing an exempt employee to an hourly employee in order to reduce overall cost and avoid the automatic increase; (2) reducing hours of work for hourly employees; or (3) layoffs or limiting the employer’s ability to expand. This will ultimately harm employees and not produce the anticipated compensation the DOL is expecting through this proposal.

Next Step

The DOL is currently reviewing the comments it received of the proposed regulations.

More information, including the notice of proposed rulemaking and a fact sheet, can be found on the DOL proposed rulemaking website.

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Anthony Samson has been the CalChamber policy advocate for environmental regulation, housing and land use issues since November 2013. He previously was an attorney at Harrison, Temblador, Hungerford, and Johnson LLP, a statewide law firm that specializes in mining, land use, and natural resources law. He earned a B.A. from the University of California at Santa Barbara, and a J.D. from Michigan State University College of Law, where he served as the articles editor of the Michigan State Law Review.