Do The Recent Federal Overtime Changes Impact California Employers?

The U.S. Department of Labor (DOL) recently finalized significant changes to federal overtime pay regulations that will impact many companies and workers. The final rule increases the weekly federal salary requirements for the overtime exemption for executive, administrative, and professional (exempt) employees, starting July 1, 2024. However, the rule will have little impact on California employers, given California’s existing salary requirements.  

An Overview Of The Federal Overtime Rule 

At the federal level, the following thresholds are coming into effect: 

• Increased Salary Threshold: To qualify for overtime exemption, exempt employees must now earn a minimum weekly salary of $844 (equivalent to $43,936 annually). This is an increase from the current threshold of $684 per week ($35,568 annually). 
• Future Adjustments: The DOL also established a mechanism to automatically update the salary threshold, with an initial rise to $1,128 per week ($58,656 annually) on January 1, 2025. The new rule further provides automatic adjustments every three years thereafter, so expect another increase in 2027, 2030, and so on.  
• Highly Compensated Employee Threshold: The annual compensation threshold for highly compensated employees (HCEs) will increase from $107,432 to $132,964 on July 1, 2024. The HCE will also update every three years.  

California Compensation Requirements 

California employers will continue to apply California’s exempt employee standard, which is higher than the federal standard. California requires employees to be paid two times the statewide minimum wage to be deemed exempt.  

The salary threshold is currently $66,560 annually. This is much higher than the proposed federal change coming into effect on July 1, 2024, and is even higher than the threshold proposed for January 1, 2025.  

It’s important to remember that while the federal threshold will be updated every three years, California salary threshold is tied to its minimum wage, which increases on January 1 each year. As a result, the exemption salary requirement in California increases every year too.  

What This Means for California Companies 

• A Reminder to Regularly Audit Your Existing Classifications. Even though these federal changes may not directly alter your overtime obligations, this serves as a good reminder to review your existing employee classifications, pay structures, and overtime policies. Penalties for non-compliance with California’s wage and hour rules are hefty, and good wage and hour practices are crucial for California employers.  
• Time Tracking Systems and Policies: You should routinely review and update your systems, if necessary, to ensure non-exempt employees are accurately tracking their working hours. You should also have processes in place to ensure your handbook reflects your company’s overtime policies, and that whenever necessary your HR team is reviewing salaries against increasing salary thresholds. Your handbook should also clarify what constitutes overtime, how to calculate it, and the procedures for requesting and approving overtime hours. 

A quick note about the Naranjo decision:  

In some good news for employers, the California Supreme Court recently ruled that an employer’s objectively reasonable, good-faith belief that it has provided employees with adequate wage statements preclude an award of penalties under section 226 of the California Labor Code.  These penalties can range up to $4,000 cumulatively for wage-statement errors.  

Despite this recent ruling being a win for employers, it still highlights the importance of the theme of implementing strong practices when it comes to wage and hour practices.  

If you need assistance with wage and hour compliance, reach out. Our employment attorneys would love to help.  

• Employment Law