Over the past several months, the U.S. Department of Labor’s Wage and Hour Division (WHD) has finalized two significant regulatory packages — one pertaining to the salary basis test used in determining exempt status, and one pertaining to calculating the “regular rate” or overtime rate for non-exempt employees.
New Federal “Regular Rate” Regulations
The WHD finalized updates to the federal regulation outlining which payments to non-exempt employees must be included in the “regular rate” calculation, which is the basis for calculating overtime. The regular rate is defined as “all remuneration” paid to the employee, excluding items such as gifts, vacation pay, discretionary bonuses, reasonable travel expenses, and others.
Changes to the regular rate regulations could impact California employers. Because there is little guidance under California law, California courts and administrative agencies consistently take the position that California will follow the federal regular rate regulations “to the extent they are consistent with California law.”
The new federal regulations make it clear that several types of payments may be excluded from the regular rate calculation, including the cost of providing parking benefits, wellness programs, employee discounts, certain tuition benefits, payments for unused paid leave, reimbursed expenses and the cost of office coffee and snacks to employees as gifts. The new regulations also provide some additional guidance on which bonuses may qualify as “discretionary.”
At this point, it is unclear whether the updated regulations are “consistent with California law.” Unfortunately, this ambiguity often gives rise to litigation. Thus, employers should consult with legal counsel as to whether any changes to their regular rate calculations are warranted.
New Federal Salary Test
This change has minimal impact in California as California law establishes a higher threshold. To qualify as an exempt employee, an individual must meet a duties test and a salary basis test. Currently, under federal law, the minimum salary required to qualify as exempt is $455 per week or $23,660 per year. As of Jan. 1, 2020, that increases to $684 per week or $35,568 per year. However, the minimum salary requirement under California law for employers with more than 25 employees will increase to $1,040 per week or $54,080 per year, so that is the threshold for California employers.
The new federal regulation also raises the total annual compensation requirement for “highly compensated employees” from the currently enforced level of $100,000 per year to $107,432 per year and allows employers to use nondiscretionary bonuses and incentive payments (including commissions) paid at least annually to satisfy up to 10% of the standard salary level. The latter two provisions are not encompassed in the California salary test and, thus, may not be used by California employers.