[1]
March 2000
CALIFORNIA OVERTIME EXEMPTIONS
AFTER AB 60
Lynn K. Thompson
Bryan Cave LLP
120 Broadway, Suite 300
Santa Monica, California 90401
(310) 576-2344
TABLE OF CONTENTS
Page
I. The Framework for Overtime Regulation in California ...... 2
A. A Brief Summary of AB 60 ...... 2
B. The IWC’s Implementation of AB 60 ...... 5
II. The Effect of AB 60 on the Major Overtime Exemptions ...... 6
A. The White Collar Exemptions ...... 6
1. Salary Requirement ...... 6
2. Minimum Salary Level ...... 7
3. Primarily Engaged in Duties that Meet the Test
of the Exemption ...... 7
4. Proposal to Clarify the Duties Test for the
Executive Exemption ...... 10
B. The Outside Sales Exemption ...... 11
C. Other Widely Available Overtime Exemptions ...... 13
1. Commissioned Employees ...... 13
2. Unionized Employees ...... 14
D. Possible New Exemptions ...... 14
1. Computer Professionals ...... 14
\ 2. Highly Compensated Employees Earning
Incentive Compensation ...... 15
III. Conclusion ...... 16
Appendices:
Executive Exemption Checklist
Administrative Exemption Checklist
Professional Exemption Checklist for Wage Orders 1, 4, 5, 9, 10 Only Professional Exemption Checklist for Wage Orders 2, 3, 6, 7, 8, 11, 12, 13, 15
Outside Sales Exemption ChecklistCALIFORNIA OVERTIME EXEMPTIONS
AFTER AB 60
In 1999, Governor Gray Davis signed legislation restoring California’s daily overtime premiums that had been eliminated in 1997 by action of the Industrial Welfare Commission (“IWC”) during the administration of Governor Pete Wilson. In order to guard against similar actions during future administrations, AB 60 codified California’s overtime requirements and related provisions into the Labor Code. At the same time, AB 60 invested the IWC with broad authority to regulate within the framework of the statutory provisions. AB 60 set into motion a flurry of regulatory activity that will have significant consequences for all employers operating in California.
This paper focuses on the effect of AB 60 on the major overtime exemptions recognized in California. It will describe how AB 60 has modified the tests used to determine the exemptions for white collar employees, outside salespersons, and employees covered by collective bargaining agreements. It will also describe proposals currently under consideration by the IWC to clarify the tests for the exemptions and to establish new exemptions not previously recognized in California.
The proper classification of employees as exempt or non-exempt often has proven problematic for employers. The regulatory framework in California is particularly confusing. Employers must comply with both the federal wage hour law (the Fair Labor Standards Act (“FLSA”)) and California laws requiring payment of overtime. Historically California laws have been more stringent and accordingly, employers operating in California must pay careful attention to California laws and regulatory interpretations when designing and administering overtime and related pay practices.
Federal and California laws contain various complete and partial overtime pay exemptions. Some exemptions that are recognized for purposes of the FLSA’s overtime requirements have no counterpart exemptions under California law./ To the extent that federal and state law recognize similar exemptions (such as the white collar exemptions and the outside sales exemption), the regulatory tests to qualify for an exemption are significantly different. As a result, employers with operations in multiple states often find that employees in California are entitled to overtime pay although employees performing identical functions in other states are not.
The consequences for employers of misclassifying employees can be high. AB 60 imposes civil penalties, in addition to back pay, to up to $100.00 per employee for each pay period the employee is underpaid. Recently trial lawyers have identified wage/hour claims as a profitable endeavor. A wave of class action lawsuits have been filed in California charging failure to pay overtime. Many of these suits have targeted large employers employing hundreds of employees in manager and assistant manager classifications. Retail businesses have been hit particularly hard. Class certifications have occurred in at least a dozen such cases in the last two years. Seven figure settlements have been reported in several cases.
I. The Framework for Overtime Regulation in California.
AB 60 codified California’s overtime requirements into Sections 500-558 of the California Labor Code. In so doing, AB 60 changed both the substantive requirements and the source of overtime regulation in California. Formerly, except in connection with public works projects, no California statute required private employers to pay overtime. Rather, overtime requirements were established by the Industrial Welfare Commission (“IWC”) as one aspect of its regulation of labor standards in California. The IWC is a five member body appointed by the Governor with consent of the Senate. Members serve four year terms. Labor Code § 70. It regulates primarily through the issuance of Wage Orders which set minimum standards governing wages, hours and working conditions in specified industries and occupations./ There are presently 15 Wage Orders./ Within the framework of AB 60’s statutory requirements, the IWC has retained an important regulatory role, particularly with respect to the establishment of overtime exemptions.
A. A Brief Summary of AB 60. Following is a summary of the provisions of AB 60 relating to overtime requirements and exemptions from overtime./
_ Overtime Premiums. Non-exempt employees are entitled to receive one and one-half times their regular rate of pay after eight daily hours of work, 40 weekly hours of work, and for the first eight hours worked on the seventh consecutive day of the same work week; and at the rate of twice the regular rate of pay after 12 hours of daily work and after eight hours worked on the seventh day of work in the work week. Labor Code § 510.
_ Make Up Time. An employee can request, with the employer’s consent, to take time off and make up the lost day on other days in the same work week without overtime for the extra time. Make up time cannot result in more than 11 hours of work in one day or 40 hours in the work week without overtime compensation. Employers are prohibited from soliciting or encouraging employees to use make up time, and the employee’s request for make up time must be documented in writing before the make up time is worked. Labor Code § 513.
_ White Collar Exemptions. The IWC is authorized to establish overtime exemptions for executive, administrative and professional employees (the so-called “white collar” exemptions) provided that the employee is primarily engaged in duties which meet the test of the exemption and the employee earns a monthly salary equivalent to no less than two times the state minimum wage for full-time employment.” Primarily is defined to mean more than one half of the employee’s work time. Labor Code § 515(a) and (e.) (The white collar exemptions are discussed in detail below.)
_ IWC to Review Exempt Duties Tests. The IWC is instructed to conduct a review of the duties which will qualify employees for a white collar exemption. The IWC may adopt or modify regulations pertaining to the duties tests by July 1, 2000. Labor Code § 515(a). (The IWC’s activities in this regard are discussed below.)
· Unionized Employee Exemption. The daily overtime, alternative schedule and related provisions do not apply to employees covered by a valid collective bargaining agreement if it includes premium wages rates for all overtime hours worked, and a regularly hourly rate of not less than 30% more than the state minimum wage. Labor Code §§ 514, 554.
_ Registered Nurses and Pharmacists Are Not Exempt Professionals. The IWC is prohibited from exempting registered nurses employed to engage in the practice of nursing, or pharmacists employed to engage in the practice of pharmacy under the professional exemption. Such employees may qualify for an exemption if they individually meet the criteria for exemptions established for executive and administrative employees. Labor Code §§ 515(f), 1186/.
_ Alternative Schedules. Alternative schedules providing for a maximum of ten hours per day within a 40 hour week without overtime can be established if 2/3 of the affected employees in a work unit approve the schedule in a secret ballot election under procedures to be determined by the IWC. The alternative schedule must involve a regular schedule (as opposed to a flexible schedule). The schedule may be a single work schedule for all employees in the work unit or a memo of options from which each employee would be entitled to choose. Overtime at the rate of time and one-half must be paid after 10 hours in a day, and for the first 8 hours of work on days other than the regularly scheduled workdays established by the alternative work week agreement. Double time must be paid after 12 hours in a workday and after 8 hours worked on days other than regularly scheduled workdays established by the alternative work week agreement./ The results of any election must be reported to the Division of Labor Research and Statistics within 30 days of any election. Pending further study by the IWC, the procedures for the establishment of an alternative schedule that existed under Wage Orders 1, 4, 5, 7, and 9 prior to 1998 will govern. These procedures include the requirement for duly noticed meetings with employees, written disclosure of the impact of the alternative schedule on wages, hours and benefits, a secret ballot vote, and accommodation obligations with respect to employees who participated in a secret ballot vote to establish an alternative schedule but who cannot work it. Labor Code §§ 515(a) and (b).
Effects on Existing Alternative Schedules: Alternative schedules that were adopted after 1998 (without secret ballot votes) are null and void as of January 1, 2000. A limited grandfather provision permits an employee who, as of July 1, 1999, was voluntarily working an alternative schedule providing for a regular schedule of not more than 10 hours per day, to continue working that schedule without daily overtime if the employer approves a written request of the employee to work the schedule. Limited grandfather provisions also apply with respect to alternative schedules previously implemented pursuant to the procedures in effect under the pre-1997 Wage orders. Labor Code §§ 515(f) and (h).
Special Provisions for Health Care Industry. Alternative schedules adopted by secret ballot vote under the provisions of Wage Orders 4 and 5 in effect prior to 1998 that provided for 12 hour shifts without overtime can be maintained until July 1, 2000, subject to further action by the IWC. The IWC is instructed to conduct a review of conditions in the industry and adopt new regulations not later than July 1, 2000. Labor Code § 515(g).
No alteration of Regular Rate. Employers are prohibited from reducing an employee’s regular rate as a result of the adoption, repeal or nullification of an alternative work schedule. Labor Code § 515(c).
_ IWC Authorized to Establish, Retain and Eliminate Exemptions from Overtime. The IWC is authorized to review, retain or eliminate any exemption contained in any valid Wage Order in effect prior to January 1, 1998. Labor Code
§ 515(b)(2). The IWC is further authorized to establish additional exemptions not inconsistent with the Labor Code “where it finds that the hours or conditions of labor may be prejudicial to the health or welfare of employees in any occupation, trade or industry.” This authority expires on January 1, 2005. Labor Code § 515(b)(1).
· IWC to Adopt New Wage Orders. The IWC is directed to adopt new Wage Orders at a public hearing prior to July 1, 2000 without convening wage boards. The new wage orders are to incorporate the provisions of AB 60, and to include further regulation by the IWC with respect to the procedures for implementing alternative work week schedules. Labor Code § 517(a).
· IWC to Review Wages, Hours and Working Conditions. The IWC is directed to conduct a review, prior to July 1, 2000, of wages, hours and working conditions in the following industries and occupations: (1) ski industry, commercial fishing industry, health care industry and stable employees in the horseracing industry (Labor Code § 517(b); (3) licensed pharmacists (Labor Code § 517(c); (3) outside salespersons. Labor Code § 517(d). The IWC is authorized to issue regulate in these areas without convening wage boards.
· IWC to Regulate Industries and Occupations Not Previously Covered. The on-site construction, mining, logging and off-site drilling industries are now subject to the Labor Code’s overtime requirements. The IWC is required to review labor conditions in these industries for the purpose of promulgating wage orders. Labor Code § 517(a).
_ Penalties. In addition to backpay, civil penalties are established for failure to pay overtime: for an initial violation, $50 per employee for each pay period the employee was underpaid; for each subsequent violation, $100 per employee for each pay period the employee was underpaid. The DLSE is empowered to issue citations for civil penalties.
B. The IWC’s Implementation of AB 60. The IWC, which had been defunded by the legislature after it eliminated daily overtime from five Wage Orders, was reconstituted after the passage of AB 60 to carry out its mandates. New members have been appointed by Governor Davis. The employer representatives are William E. Dombrowski, president of the California Retailers Association, and Leslee A. Coleman, Director of Worldwide Government and Community Relations of Solectron. The labor representatives are Charles H. Center of the Laborers Union, and Barry Broad, formerly legislative advocate for the Teamsters Union. The fifth member who represents the general public is Douglas Bosco.
Since January 1, 2000, the IWC has been actively engaged in regulatory activities. It has been holding public hearings and taking testimony from representatives of business, labor and employees on a variety of issues arising under AB 60. On January 28, 2000 the IWC issued an Interim Wage Order which became effective on March 1, 2000. The Interim Wage Order applies to all industries and occupations regulated by Wage Orders 1, 4, 5, 7, and 9, and it will remain in effect until new wage orders are issued. A copy of the Interim Wage Order and Statement of its Basis are included in your ICC conference materials. On March 1, 2000 the IWC issued a Notice of Public Hearing of the IWC on March 31, 2000, in Sacramento, for the purpose of considering modifications to the Wage Orders addressing, among other things, outside salespersons, the duties test for executive, administrative and professional employees, and possible new exemptions. These proposals are discussed below.