Minimum Salary for Exempt Employees

The federal minimum salary level for exempt status employees is to take effect December 1, 2016 which will increase the salary threshold from $23,660 to $47,476 per year.

Although Congress has numerous proposals to delay or phase in the new overtime rule, President Barack Obama would likely veto them. Therefore, it's time for employers to prepare.

The California exempt threshold is based on the California minimum wage which is set to increase January 1, 2017 to $10.50 per hour. The exempt salary level for California is two-times the minimum wage. January 1 this will increase to $43,680. 

If the federal minimum threshold goes through (as it appears it will), California employers will have to recognize the higher salary limit with the federal exemption. This is the first time the federal minimum salary threshold will be more than California. 

The Employee Still Needs to Pass the Duties Test to Be Classified as Exempt

Most employers believe that so long as an employee is paid a salary, they are exempt from the requirement to pay overtime wages. This is not correct. Income or salary alone does not determine exempt status. Job titles also do not designate an employee as exempt or non-exempt.

Generally, two requirements must be met to classify an employee as exempt:

1) They must earn a salary and

2) Hold a position with duties the U.S. Labor Department designates as appropriate for exempt positions.

It is entirely possible that an employee could meet requirements of the salary level tests and still fail to qualify as an exempt employee under the FLSA because the employee might not meet the requirements of the duties test.

The salary test is always first because if you don’t pass the salary test there is no need to go any further. However, the employee’s duties (the duties test) must be at an exempt level - Does the employee direct the work of others? Does their work relate to the management of the employer? Do they exercise discretion and independent judgment with respect to matters of significance? If you cannot answer these questions with an affirmative yes, you have probably misclassified your employee(s).

With the minimum salary nearly doubling with the new overtime rule employers may be tempted to convert employees to independent contractors to avoid paying higher salary or overtime to those who do not meet the salary threshold.

If the employee is doing the same job they did as a salaried employee and they are then reclassified as independent contractor it may invoke state and federal agencies to get involved to determine the employees true status.

The independent contractor arrangement can benefit both workers and businesses. However, a company that misclassifies its workforce as independent to avoid paying overtime, payroll tax or providing benefits, could be liable for the uncollected payroll taxes, interest and penalties. Regular status employees are entitled to certain legal protections and benefits that independent contractors are not — and the IRS and state governments are actively looking for clues that a company might be misclassifying the workers.

There are so many important legal issues that hinge on the distinction between employee verses the independent contractor and/or exempt verse non-exempt. It is essential that employers realize these issues before embarking on changing employee classification.

Now is the perfect time to conduct an audit of your employee classification and make necessary adjustments. 

TruHR Business Consultants welcomes your questions, inquires and feedback. If you would like to receive more information about HR Consulting, audits or training, please contact us at [email protected] or visit us online at TruHRbc.com