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ARE YOUR EMPLOYEES ENTITLED TO OVERTIME? NON-EXEMPT VERSUS EXEMPT CLASSIFICATION OF EMPLOYEES UNDER CALIFORNIA LAW

April 27, 2018

I. Reasons for Wage and Hour Protective Laws

Modern wage and hour protective laws have developed in the United States since the early 1900s as a result of horrendous cases of employer abuses in working hours, working conditions, and anti union employer sentiment. Wage and hour laws have progressed steadily since, with changes often dependent upon the national or state political party in office. The laws were enacted to protect low paid workers typically employed in factory and agriculture work, but have expanded to include white collar as well as blue collar employees.

This article focuses on non-exempt versus exempt employees and the relevance to overtime pay. The article presumes the worker is an employee of the business, and not an independent contractor or self-employed individual. Whether an individual is an employee, independent contractor, or self-employed individual is a separate analysis.

II. California Overtime Rates of Pay

California law presumes that all employees are non exempt employees, meaning that they are not excluded from Labor Code requirements such as overtime pay, meal and rest breaks, and minimum wage. Exempt employees are designated as such because they are excluded from certain wage and hour requirements due to their duties and pay.

In California, a "regular" workday is eight (8) hours, and a regular work week is 40 hours. A non-exempt employee must be paid overtime pay when the employee works more than eight (8) hours in any workday, more than 40 hours in a work week or works on the seventh (7th) consecutive workday in a work week.

The rate of overtime pay is one and one-half times (1 ½) an employee’s "regular rate of pay" for work in excess of eight (8) hours up to 12 hours in a workday, and for the first eight (8) hours worked on the seventh (7th) consecutive day of work in a workweek. An employee is entitled to double the employee’s regular rate of pay for all hours worked in excess of 12 in any workday, and for all hours worked in excess of eight (8) hours on the seventh (7th) consecutive day of work in any workweek.

The overtime rate of an employee’s compensation required to be paid to a non-exempt full-time salaried employee is computed by using the employee’s regularly hourly salary as one-fortieth of the employee’s weekly salary.

III. Certain Categories of Employees Are Classified as "Exempt" and Not Entitled to Overtime

There are several exempt employee categories and nuances to those exemptions. Below are categories of employees who are exempt from overtime. The list is not exhaustive of all categories; they are categories employers in urban areas are likely to encounter. There are very specific requirements for each exemption. For an employee to be exempt, the employer must comply with all wage and hour requirements of the exempt category. If a requirement is not met, the employee is not exempt and may be adjudicated at a later date to be non-exempt and subject to back pay for such wage and hour provisions as overtime, meal and rest breaks and numerous other statutory monetary penalties under the Labor Code. It is also important to note that certain exemptions only exempt the employee from specific Labor Code provisions (for example, the inside sales exemption (see below) only exempts the employee from overtime pay requirements. However, the employer is still required to provide meal and rest breaks).

To be classified as exempt from overtime, the employee must qualify as an executive/managerial, administrative, professional, computer professional, and qualifying inside or outside salesperson. Job titles do not cause an employee to be exempt; it is job duties that determine whether the employee is non-exempt or exempt. In addition to qualify as exempt, the employee must also earn a "salary" of at least twice the state minimum wage for full time employment. Part time employment does not affect the weekly, monthly, and annual salary. A salary is generally understood to be a fixed rate of pay as distinguished from an hourly wage.

A. Executive/Managerial Exemption - In order to meet the executive (managerial) exemption, the employee must meet all of the following requirements:

(1) Employee’s duties and responsibilities involve the management of the enterprise in which he or she is employed or of a customarily recognized department or subdivision of thereof;

(2) Employee customarily and regularly directs the work of two or more other employees;

(3) Employee has the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring or firing and as to the advancement and promotion or any other change of status of other employees is given particular weight;

(4) Employee customarily and regularly exercises discretion and independent judgment;

(5) Employee is "primarily engaged" in duties that meet the test of the exemption; and

(6) Employee earns a monthly salary equivalent to no less than two times the state minimum wage for full time employment.

The term "primarily engaged in" under California law means that more than one half – more than 50% – of the employee’s work time must be spent engaged in exempt work duties.

B. Administrative Exemption - To meet the administrative exemption, an employee must meet all of the following requirements:

(1) Employee spends more than one half of his or her work time performing office or non manual work directly related to management policies or general business operations for the employer or the employer’s customers;

(2) Employee "customarily and regularly" exercises discretion and independent judgment in carrying out job duties as to matters significant to the employer’s business;

(3) Employee performs his or her job only under general supervision and works along specialized or technical lines requiring special training, experience, or knowledge; and

(4) Employee must earn a monthly salary equivalent to no less than two times the state minimum wage.

NOTE: The categories for administrative exemption are broad. Federal law must be reviewed to determine whether an employee is non-exempt or exempt under this exemption.

C. Professional Employee - A person employed in a professional capacity must meet all of the following requirements:

(1) Employee is licensed or certified by the State of California and is primarily engaged in the practice of law, medicine, dentistry, optometry, architecture, engineering, teaching, or accounting; or is engaged more than one-half of his or her time engaged in an occupation commonly recognized as a learned or artistic profession.

(2) "Learned or artistic profession" means an employee primarily engaged in the performance of:

(a) work requiring an advanced type in a field or science or learning customarily acquired by a prolonged course of specialized intellectual instruction and study, as distinguished from a general academic education whose work is predominantly intellectual and varied in character;

(b) who customarily and regularly exercises discretion and independent judgment; and

(c) who earns a monthly salary equivalent to no less than two (2) times the state minimum wage.

(3) Exceptions to exempt status:

(a) Pharmacists working in a pharmacy are not considered exempt professional employees unless they meet the criteria for executive or administrative employees; and

(b) Registered nurses, certified nurse anesthetists, certified nurse midwives, and certified nurse practitioners are not exempt unless they meet the criteria for executive or administrative employees.

D. Computer Professional Exemption - To be an exempt computer professional, the employee must meet the following requirements:

(1) Employee is primarily engaged in work that is intellectual or creative and requires the exercise of discretion and independent judgment;

(2) Employee is primarily engaged in duties that consist of one or more of the following:

(a) Application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software, or system functional specifications;

(b) Design, development, documentation, analysis, creation, testing, or modification of computer systems or programs, including prototypes, based on and related to, user or system design specifications;

(c) Documentation, testing, creation, or modification of computer programs is related to the design of software or hardware for computer operating systems;

(3) Employee is highly skilled and is proficient in the theoretical and practical application of highly specialized information to computer systems analysis, programming, and software engineering.

(4) Employee’s hourly rate of pay is not less than forty-two dollars and sixty-four ($42.64) cents, as of January 1, 2018. [NOTE: The hourly rate is evaluated annually and adjusted October 1 of each year to become effective on January 1.]

E. Commissioned Inside Sales Exemption - To qualify as an exempt commissioned inside sales employee, an employee must meet the following requirements:

(1) Employee’s earnings must exceed one and one half (1 ½) times the California minimum wage; and

(2) More than one-half (½) of the employee’s compensation must be commissions. (NOTE: This exemption is "pay period specific"; that is, an employee may be exempt for one pay period and not qualify as exempt for the next, and so on.)

NOTE: This exemption applies only to the overtime requirement. Other wage and hour requirements such as minimum wage,and meal and rest breaks still must be met.

F. Outside Salesperson Exemption - To qualify as an exempt outside salesperson the employee must:

(1) Be at least 18 years old;

(2) Customarily and regularly work more than one-half (½) of their work time away from the employer’s place of business; and

(3) Be engaged in selling tangible items or obtaining orders or contracts for products, services, or use of facilities.

In conclusion, determination of whether an employee is non-exempt and entitled to overtime pay or exempt is often difficult. Many employees fall in gray areas requiring review of the employee’s job duties followed by application of current law. New legislation and appellate court decisions regularly change overtime and other wage and hour laws. Further, state law may overlap with or contradict federal law, rules, and regulations.

Kenneth J. Sargoy, Esq. provides counseling and representation regarding employment matter in California and federal courts and state and federal government agencies. Questions may be directed to Ken at telephone (310) 208-1003 or (310) 472-7113 or to his email, [email protected]. The office is located at 815 Moraga Drive, Los Angeles, CA 90049. To view the website of the Law Office of Kenneth J. Sargoy, click here: http://sargoylaw.com.

NOTE: The Sargoy Law Newsletter is designed to provide general information. It is not intended to, nor does it, offer solutions to individual problems. Persons having specific questions should contact counsel for professional advice. THE SARGOY LAW NEWSLETTER IS CONSIDERED ADVERTISING MATERIAL UNDER APPLICABLE RULES OF PROFESSIONAL CONDUCT.

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