Increases to California’s Minimum Wage Signed into Law

On September 12, 2006, California Governor Arnold Schwarzenegger signed into law California Assembly Bill (AB) 1835 that will increase California’s minimum wage by $1.25 per hour in two steps over a period of one year.

Effective January 1, 2007, the California minimum wage will increase by $0.75, from $6.75 per hour to $7.50 per hour. On January 1, 2008, the California minimum wage will increase by an additional $0.50, from $7.50 per hour to $8.00 per hour.

Companies that employ minimum wage workers in California will need to plan for the increased wage costs, including the resulting increase to overtime wage rates. Unlike the Fair Labor Standards Act (FLSA), California’s definition of “overtime” includes time worked in excess of eight (8) hours in one workday. In general, California requires payment of overtime at no less than one and a half times the minimum wage. In certain circumstances, however, overtime must be paid at no less than two times the minimum wage.

The minimum wage increases also will affect large numbers of California workers who earn well in excess of the minimum wage, as the salary requirement for overtime exemptions are based on the minimum wage rate.

Just as under the FLSA, a position generally must meet (1) a compensation test and (2) a duties test in order to be “exempt” from minimum wage and overtime requirements under California law. The compensation test for the “whitecollar” exemptions under California law requires that the position pay a salary—a regular, recurring amount not subject to reduction or offset based on the quantity or quality of work performed—that is at least two times the minimum wage. This means that, effective January 1, 2007, positions intended to be exempt under California’s executive, administrative, or professional exemptions must pay a salary of at least $600 per week, which is equivalent to $2,600 per month or $31,200 per year. Effective January 1, 2008, these amounts increase to $640 per week, $2,773.33 per month, or $33,280 per year.

Positions intended to be exempt under California’s “inside commissioned sales” exemption must satisfy a different compensation test. Those positions need to generate total compensation for employees of at least one and a half times the minimum wage for each hour worked, of which more than 50% must represent commissions. This means that, effective January 1, 2007, positions intended to meet this California exemption will need to pay a total compensation of at least $450 per week for an employee who actually works 40 hours each week ( $1,950 per month or $23,400 per year), with more than 50% of that amount being paid to the employee as commission earnings.

Although unrelated to AB 1835, another wage increase likely will take effect on January 1, 2007. Each October 1, the California’s Division of Labor Statistics and Research adjusts the minimum wage rate necessary to meet the compensation test of the California computer software professional exemption. This adjustment takes effect on the following January 1 and is based on any increase in the California Consumer Price Index for Urban Wage Earners and Clerical Workers. Presently, the compensation test for this California exemption requires that the employee earn $47.81 per hour for all hours actually worked, which would result in an annual compensation of $99,444.80 for an employee who actually works 2,080 hours during the year.

Of course, the various compensation tests constitute just one of the two tests that must be met in order for a position to qualify as exempt. As with the compensation test, California’s duties test for various exemptions differ significantly from the duties test of corresponding exemptions under the FLSA.

To review the text of AB 1835, visit http://leginfo.ca.gov/pub/bill/asm/ab_1801-1850/ab_1835_bill_20060823_amended_sen.pdf

For further information, please feel free to contact any of the following Morgan Lewis lawyers:

Irvine
Barbara Miller 949.399.7107 [email protected]

Los Angeles
John Battenfeld 213.612.1018 [email protected]

Palo Alto
Carol Freeman 650.843.7520 [email protected]

San Francisco
Karen Peteros 415.442.1650 [email protected]

Morgan, Lewis & Bockius LLP