Question:

I am hiring a new employee and would like to avoid the tedious time-tracking and overtime requirements. Can I classify my employee as “exempt” to do this?

Answer:

In California, determining whether an employee is exempt from overtime requires a narrow, specific analysis. You must meet all the requirements for a position in order to classify an employee as exempt. Ya can’t just go doing this willy nilly!

So, How Do We Do The Exemption Analysis?

By and large for our clients, exempt employees will fall into one of three exempt categories: executive, professional, or administrative. However, other specific industry exemptions also exist such as the computer professional or outside salesperson.

For the most part, the executive exemption applies to most managers, the professional exemption applies to “learned” professionals like doctors and “artistic” professionals like graphic designers, and the administrative exemption applies to employees with broad administrative powers. Of course, this is simplifying these exemptions; they are very specific in who falls under each. We recommend visiting the Department of Industrial Relations’ pages on each and/or speaking with a lawyer to determine if your employee might fall under one of these exemptions!

When an employee falls under any of these three categories, the exemption analysis will look at three things: (1) the job duties; (2) the method of compensation; and (3) the total compensation amount.

The Job Duties Prong

In California, to be properly classified as exempt, an employee must be “primarily engaged” in exempt duties. In general, the employee must spend more than 50 percent of his/her weekly work time performing exempt duties. This is important! Hybrid duties (meaning some that are exempt duties and some that are non-exempt) are important to watch out for, because if you dip under that 50 percent mark, the employee is technically non-exempt.

Although exempt duties will differ based on the specific exemption that applies (a doctor and a graphic designer are most certainly going to be doing different things!), under California law most exemptions require the employee to customarily and regularly exercise discretion and independent judgment.

Discretion and independent judgment involves comparing and evaluating possible courses of conduct and acting or making a decision after considering various possibilities. Think of it this way: a doctor gets to decide how they will treat their patients, because they are educated in medicine and have been trained to do so. A graphic designer might determine that they’d rather use one computer program over another on a project because their artistic training allows them to evaluate which will yield more appealing results.

An employee with discretion and independent judgment must either:

• Have the power to make independent choices pertaining to significant matters, and free from immediate supervision; or
• Have the ability to make a recommendation for action that is subject to a superior’s final authority. The employee must possess sufficient authority for the recommendations to affect matters of consequence to the business or its customers.

Back to that doctor and graphic designer! The doctor gets to make potentially life-altering decisions on the fly without having to run every single action up a chain of command— boom, bullet point 1, check! A graphic designer might recommend to their superior one program over another because they’re the expert and their superior trusts their independent judgment— boom, bullet point 2, check!

These types of activities do not involve exercising discretion and independent judgment:

• Applying knowledge to follow prescribed procedures;
• Determining which procedures to follow;
• Determining if specified standards are met;
• Determining if an object falls into one or another grade or class; and/or
• Training for an exempt position.

Pro Tip #1: The job title alone does not make the position exempt

We know, there are some jobs that require a ton of brains, creativity, or initiative. That doesn’t mean they’re automatically exempt just because you might write on their job description “this position is exempt.” It is necessary to analyze an employee’s duties and level of responsibility to determine whether or not a position is exempt based on very clearly laid out requirements by the state. We wish it were as easy as waving a magic exemption wand, but unfortunately, it’s not.

The Compensation Method Prong

This prong is pretty easy. To be properly classified as an exempt employee under any of the three main exemptions in California, an employee MUST be paid on a monthly salary basis. That means if your employee is paid on an hourly basis, they cannot be exempt. If they’re paid quarterly, what the heck are you doing? They cannot be exempt. Sorry gang, them’s the rules.

The Compensation Amount Prong

No here’s the part that throws people: not only do your employees need to be paid on a salary basis, they need to be paid a particular amount. In California, to meet the salary basis test for exempt status, an employee must earn a monthly salary no less than two times the state minimum wage for full-time employment, which is defined as 40 hours per week. We’ll break this down below:

• As of 2022, California’s minimum wage will be $14 per hour for employers with 25 or fewer employees, and $15 per hour for employees with 26 or more employees.
• So here’s how we calculate the total salary amount for a business with 25 or fewer employees:
  • $14 x 2= $28 as “two times the state minimum wage”
  • $28 x 40 hours per week x 52 weeks per year= $58,240 per year annual salary
  • $58,240 / 12 months= $4,853.34 per month
• And now, the calculation for a business with 26 or more employees:
  • $15 x 2= $30 as “two times the state minimum wage”
  • $30 x 40 hours per week x 52 weeks per year= $62,400 per year annual salary
  • $58,240 / 12 months= $5,200 per month

Remember, these are simply minimums. If your employees make more than this, great! If they make less than this, unfortunately, they won’t meet this prong and will not be able to be properly classified as exempt.

Pro Tip #2: Ignore the local minimum wage

For hourly employees, we always recommend looking into whether your city has a local minimum wage ordinance. If they do, it is most likely higher than the state minimum wage, and you will need to pay your employees at the higher amount. For example, San Diego’s minimum wage is $15 per hour for any business within city limits, regardless of employee pool size. So if you have 25 employees or less and this ordinance applies to you, that’s $1 higher than the state’s minimum wage!

However, when we are performing the exemption analysis, we ignore any local minimum wage and only do this calculation using the state minimum wage. We underlined the word “state” in our explanation above for a reason! It’s part of the exemption law, crystal clear.

Pro Tip #3: Revisit the salary annually

Because the salary for an exempt employee is based on state minimum wage and California’s minimum wage rises every year until we hit a $15 per hour across the state, you’ll need to revisit the salary amount annually to ensure you’re still above the minimum threshold. For example, in 2023, an employee at a business with 25 or more employees will need to have their salary bumped from $58,240 to $62,400 in order to retain exempt status. We know that money doesn’t materialize over night, so that’s why we’re giving you the heads up! Plan ahead for this

To Wrap Up….

Exemption is a legal concept; it’s not solely an employer decision. In order to properly classify an employee as exempt, the employee must meet the proper exemption requirements under law. We know it can be a lot to navigate the ins and outs of these exemptions, so feel free to email bertie@inbetterwetrust.com with your questions. We offer free 30-minute consultations and love to chat with our current clients, too!