Exempt employees in California: The administrative exemption

Exempt employees in California are those who are not subject to overtime pay for hours worked in excess of 8 in a day or 40 in a week. Since these employees are not being paid overtime, it may be tempting to classify as many employees “exempt” as possible, but they must meet strict requirements to qualify, and misclassification comes with penalties—it’s a risk no one should take. Misclassification also exposes a company to lawsuits brought by disgruntled employees and former employees.

Exempt employees in California: Qualifying for any exemption

To qualify for exemption, employees must meet three tests:

• Salary Level. An exempt employee must earn a minimum amount. The minimum salary requirement in California is two times minimum wage for full time employment. This means ($8.00 x 2) x 2080 hours = $33,280.00 per year, which equates to $2,773.33 per month, or $640.00 per week. Contrast that with the federal requirement, which is a salary level of at least $455.00 per week. Also remember that some jobs have even higher requirements to meet the exempt status, such as computer professionals.
• Salary Basis. The minimum amount or more must be paid on a salary basis. A salary is a minimum amount of guaranteed compensation that does not fluctuate based on quality or quantity of production. When an employee is paid on a salaried basis, s/he is not paid based on hours worked, and the pay cannot be subject to impermissible deductions.
• Job Duties. Exempt employees must perform certain executive, administrative or professional job duties set forth in the regulation. These vary per exemption. However, the employee must be primarily engaged in these duties. Primarily engaged means more than one-half of the employee’s work time is spent engaged in “exempt” work.

Exempt employees in California: The administrative exemption

Here’s some guidance on the exemption requirements for the administrative exemption, which is one of the exemptions causing the most confusion for employers. In addition to the above requirements for salary, those who qualify for the administrative exemption must:

• Perform office or non-manual work directly related to management policies, or general business operations, or to the employer’s customers. To meet this requirement, the employee must perform work that is directly related to assisting with the running or servicing of the business. This type of work is different, for example, from working on a manufacturing production line or selling a product in a retail or service establishment.

  Work directly related to management or general business operations includes, but is not limited to, work in such areas as tax, finance, accounting, budgeting, auditing, insurance, quality control, purchasing, advertising, marketing, research, safety and health, human resources, public relations, legal and regulatory compliance, and similar activities.

• Customarily and regularly exercise discretion and independent judgment. “This is where, when you’re looking at the administrative exemption, where a lot of time the analysis starts to break apart because they do not have the independent judgment and discretion on matters of significance.” Marc L. Jacuzzi warned in a recent CER webinar. Exercising discretion and independent judgment generally involves an employee comparing and evaluating possible courses of conduct, and acting or making a decision after the various possibilities have been considered.

  The term “matters of significance” refers to the level of importance or consequence of the work performed. In determining whether or not an employee exercises discretion and independent judgment, all the facts involved in the particular employment situation must be considered. The term implies that the employee has authority to make an independent choice, free from immediate direction or supervision. However, employees can exercise discretion and independent judgment even if their decisions or recommendations are reviewed, and occasionally reversed, at a higher level.

The above information is excerpted from the webinar “Exempt vs. Nonexempt in California: How to Find and Fix Misclassification Mistakes.” To register for a future webinar, visit CER webinars.

Marc L. Jacuzzi, Esq., is a shareholder in the law firm of Simpson, Garrity, Innes & Jacuzzi. He advises clients regarding all aspects of the employer/employee relationship including hiring and termination, wage and hour requirements, employee classification, civil rights and discrimination issues, employee investigations, commission plans, employment contracts, employee handbooks and policies, confidential information agreements, reductions in force, leaves of absence, employment audits, M&A employment issues, violence in the workplace, and international employment issues.