EXEMPT VS NON-EXEMPT IN CALIFORNIA – 2023 PERSPECTIVES
Determining correct exemption status for California employees is one of the most challenging, complicated and risky tasks faced by human resources professionals. Generally, employees are to be considered non-exempt (hourly) unless they meet the very specific requirements for exempt status. Most employees in a company will be non-exempt, as it is usually more productive to have more people actually doing the work than managing and supervising the work.
It is common to want employees to be exempt because it makes so much of administration easier and can be more conducive to managing employee costs. This is however not at all in line with California wage and hour laws, which are very prescriptive and must be followed in all cases.
It does not matter what the employer or the employee want. It is strictly and only a matter of following the California requirements for determining exempt or non-exempt status. It is also critical to recognize that exempt status should not be confused with the degree of importance an employee has within an organization. Everyone is important, but only a few will actually meet the standards to be classified as exempt.
For a comprehensive overview of exempt classifications in California updated for 2023, please continue to our blog.
DETERMINING FLSA STATUS FOR CALIFORNIA EMPLOYEES
There are three factors which must all be in place in order for an employee to be classified as exempt from overtime in California:
Salary Threshold – The salary threshold in California is two times the state minimum wage. For 2023, this is $15.50 per hour X 2,080 hours/year X 2 = $64,480. This means that any California employee earning less than $64,480 per year cannot be considered an exempt employee. Remember that the $15.50 minimum wage now applies to all employers in the state and there is no longer a lower rate for employers with 25 or fewer employees.
The salary threshold is based on the state’s minimum wage, and is not affected by any local or regional minimum wage ordinance.
Salary Basis – The salary basis describes how an exempt employee is to be paid, what can be deducted from the employee’s pay and what cannot be deducted. Violating the salary basis by making an improper deduction from an exempt employee’s pay could potentially invalidate the exemption. If an employee is not paid correctly according to the salary basis, they cannot be considered an exempt employee.
Duties Test – In California, the duties test is interpreted to mean that the employee must be performing exempt level work more than 50% of the time in the workweek. It is not determined by the job title or by the job description. It is determined by what the employee actually does during the work day. California uses the 50% rule, but other states look more at the “primary duties and responsibilities” of the role rather than a strict time-based formula. In California, if an employee is not performing exempt level work more than 50% of the time, they cannot be considered an exempt employee regardless of their job title or job description.
Exempt employees are classified under a specific exemption. In California these are the Administrative exemption, The Executive exemption, the Professional exemption (including Computer Professional), the Outside Sales professional and the Inside Sales professional.
THE DUTIES TEST AND CALIFORNIA’S 50% TIME RULE
When evaluating the actual work an employee does for determining exempt or non-exempt status, the first critical, yet difficult, point of understanding should be that the importance of the work to the organization is not what qualifies a role as exempt. All jobs are important, but that does not mean that they will meet the very specific requirements included in the California duties test.
Exempt work specifically includes, for example, all work that is directly and closely related to exempt work and work that is properly viewed as a means for carrying out exempt functions. When evaluating whether the work actually performed by the employee during the course of the workweek satisfies the requirements for the exemption, the amount of time the employee spends on such work, together with the employer’s realistic expectations and the realistic requirements of the job, are to be considered.
The California exemptions provide that “primarily engaged in the duties that meet the test” means that more than 50 percent of the employee’s work time is spent engaged in exempt duties, with time being the only criteria, and that the exempt employee must customarily and regularly exercise discretion and independent judgment in performing those duties.
DEFINING “DISCRETION AND INDEPENDENT JUDGMENT”
The Fair Labor Standards Act (FLSA) has provided guidance that is used in California to identify what can and what cannot be considered “discretion and independent judgment.” According to the FLSA, “An employee does not exercise discretion and independent judgment with respect to matters of significance merely because the employer will experience financial losses if the employee fails to perform the job properly.”
So, how does the FLSA define this?
In general, the exercise of discretion and independent judgment involves the comparison and the evaluation of possible courses of conduct, and acting or making a decision after the various possibilities have been considered. The exercise of discretion and independent judgment must be more than the use of skill in applying well-established techniques, procedures or specific standards described in manuals or other sources.
The exercise of discretion and independent judgment implies that one has authority to make an independent choice, free from immediate direction or supervision. However, discretion and independent judgment can be exercised even if the decision or recommendation is reviewed at a higher level. Thus, the term “discretion and independent judgment” does not require that the decisions being made have to be final or free from review. The fact that one’s decisions may be subject to review and that upon occasion the decisions are revised or reversed after review does not mean that one is not exercising discretion and independent judgment.
Further, according to the FLSA, the phrase “discretion and independent judgment” must be applied in the light of all the facts involved in the particular situation in which the question arises. Factors to consider when determining whether an employee exercises discretion and independent judgment with respect to matters of significance include, but are not limited to:
- whether the employee has authority to formulate, affect, interpret, or implement management policies or operating practices;
- whether the employee carries out major assignments in conducting the operations of the business;
- whether the employee performs work that affects business operations to a substantial degree, even if the employee’s assignments are related to operation of a particular segment of the business;
- whether the employee has authority to commit the employer in matters that have significant financial impact;
- whether the employee has authority to waive or deviate from established policies and procedures without prior approval;
- whether the employee has authority to negotiate and bind the company on significant matters;
- whether the employee provides consultation or expert advice to management;
- whether the employee is involved in planning long- or short-term business objectives;
- whether the employee investigates and resolves matters of significance on behalf of management; and
- whether the employee represents the company in handling complaints, arbitrating disputes or resolving grievances.
When considering the degree to which an employee exercises discretion and independent judgment based on the FLSA definitions, California employers must also keep in mind the 50% rule. This needs to be a genuine primary duty and responsibility, not something random or occasional.
A final important consideration is that exempt status can be fluid. Exempt today does not necessarily mean the employee will be exempt tomorrow. – and vice versa. During periods of exceptional turnover, it is not unusual for an employee to take on the duties and responsibilities of their former colleagues. A supervisor who loses their administrative support and takes on those tasks themselves may no longer be spending more than 50% of their time on exempt level duties. Conversely, a non-exempt employee who takes on the managerial responsibilities of a former leader might be eligible for exempt status (all other requirements being in place).
A LOOK AT THE CALIFORNIA EXEMPTIONS
To qualify for the administrative exemption, an employee must pass the salary and duties tests.
Salary Level Test
To be exempt, an administrative employee must earn a monthly salary equivalent to at least two times the state minimum wage for full-time employment. “Full-time employment” is defined as 40 hours per week. In order to qualify as an exempt employee in California in 2023, the employee must earn at least $1,240 per week, or $64,480 annually, exclusive of board, lodging, and other facilities.
An employee must pass a duties test to qualify for the administrative exemption in California:
- They perform either:
(a) Office or nonmanual work directly related to management policies or general business operations of his or her employer or his or her employer’s customers; or
(b) Functions in the administration of a school system, in an educational establishment or institution, or of a department or subdivision thereof, in work directly related to the academic instruction or training.
- They must customarily and regularly exercise discretion and independent judgment.
- An exempt administrative employee must either:
(a) Regularly and directly assist a proprietor or an employee employed in a bona fide executive or administrative capacity;
(b) Perform under only general supervision work along specialized or technical lines requiring special training, experience, or knowledge; or
(c) Execute special assignments and tasks under only general supervision.
The employee must be primarily engaged in duties that meet the test of the exemption. The activities constituting exempt work and nonexempt work are construed in the same manner as those terms are construed under the Fair Labor Standards Act (FLSA) and federal regulations. Exempt work includes, for example, all work that is directly and closely related to exempt work and work that is properly viewed as a means for carrying out exempt functions. The work actually performed by the employee during the course of the workweek must, first and foremost, be examined, and the amount of time the employee spends on such work (more than 50 percent), together with the employer’s realistic expectations and the realistic requirements of the job, will be considered in determining whether the employee satisfies this requirement.
Administrative vs. production work. An area of confusion for workers is determining whether work is administrative or production work. Production work is nonexempt. The courts have in the past referred to this distinction as the administrative/production dichotomy. The California Supreme Court in (Harris v. Superior Court, 53 Cal.4th 170 (2011)) instead turned to more recent statutes and regulations for guidance. It explained that work qualifies as “directly related” only if it is both qualitatively and quantitatively administrative. The qualitative component requires the work to be administrative in nature; it includes work done by white-collar workers engaged in servicing a business. The quantitative component requires it to be of “substantial importance to the management or operations of the business.” The Supreme Court stressed that it was ruling only that the administrative/production worker dichotomy is not the decisive test, but it may be considered.
To qualify for the executive exemption, an employee must pass the salary and duties tests.
Salary Level Test
To be exempt, an executive employee must earn a monthly salary equivalent to at least two times the state minimum wage for full-time employment. “Full-time employment” is defined as 40 hours per week. In order to qualify as an exempt employee in California in 2023, the employee must earn at least $1,240 per week, or $64,480 annually, exclusive of board, lodging, and other facilities.
An employee must pass a duties test to qualify for the executive exemption in California:
- The employee’s duties and responsibilities must involve the management of the enterprise in which he or she is employed or of a customarily recognized department or subdivision thereof;
- The employee must customarily and regularly direct the work of two or more other employees;
- The exempt executive employee must either have the authority to hire or fire other employees or his or her suggestions as to hiring or firing, advancement and promotion, or any other change of status of other employees must be given particular weight; and
- The employee must customarily and regularly exercise discretion and independent judgment.
The employee must be primarily engaged in duties that meet the test of the exemption. The activities constituting exempt work and nonexempt work are construed in the same manner as those terms are construed under the FLSA and federal regulations. Exempt work includes, for example, all work that is directly and closely related to exempt work and work that is properly viewed as a means for carrying out exempt functions. The work actually performed by the employee during the course of the workweek must, first and foremost, be examined, and the amount of time the employee spends on such work (more than 50 percent), together with the employer’s realistic expectations and the realistic requirements of the job, will be considered in determining whether the employee satisfies this requirement. Please see the national Exempt Personnel section. .
Note: The federal regulations for the executive exemption are not as strict as California law and, therefore, have little effect on California employees. Because California law is stricter than federal law, California employers should follow state law.
Practice tip: According to the Industrial Welfare Commission, the most frequent cause of misapplication of the phrase “discretion and independent judgment” is the failure to distinguish discretion and independent judgment from the use of independent managerial skills. An employee who merely applies his or her memory in following prescribed procedures or determining which required procedure out of the company manual to follow is not exercising discretion and independent judgment.
To qualify for the professional exemption, an employee must pass the salary and duties tests.
Salary Level Test
To be exempt, a professional employee must earn a monthly salary equivalent to at least two times the state minimum wage for full-time employment. “Full-time employment” is defined as 40 hours per week. In order to qualify as an exempt employee in California in 2023, the employee must earn at least $1,240 per week, or $64,480 annually, exclusive of board, lodging, and other facilities.
An employee satisfies the duties requirement under California law if:
- The employee is licensed or certified by the state of California and primarily engaged in the practice of one of the following recognized professions: law, medicine, dentistry, optometry, architecture, engineering, teaching, or accounting. or
- The employee is primarily engaged in an occupation commonly recognized as a learned or artistic profession. For these purposes, “learned or artistic profession” means an employee who is primarily engaged in the performance of:
- Work requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction and study, as distinguished from a general academic education or from an apprenticeship, and from training in the performance of routine mental, manual, or physical processes, or work that is an essential part of or necessarily incident to any of the above; or
- Work that is original and creative in character in a recognized field of artistic endeavor (as opposed to work that can be produced by a person endowed with general manual or intellectual ability and training) and the result of which depends primarily on the invention, imagination, or talent of the employee, or work that is an essential part of or necessarily incident to any of the above; and
- Work that is predominantly intellectual and varied in character (as opposed to routine mental, manual, mechanical, or physical work) so that the output produced or the result accomplished cannot be standardized in relation to a given period of time.
- The employee customarily and regularly exercises discretion and independent judgment in the performance of the previously described duties.
Note: The federal regulations for the professional exemption are generally not as strict as California law and, therefore, have little effect on California employees.
The exempt duties requirements in California are specifically required to be interpreted in accordance with the similar requirements of federal law.
Highly Paid Hourly Computer Software Employees
A special exemption from overtime requirements applies to certain very highly paid and highly skilled professional computer employees, even though they are paid on an hourly basis (CA Lab. Code Sec. 515.5). An employee qualifies for this exemption only if all the following requirements are met:
- The employee is primarily engaged in work that is intellectual or creative and requires the exercise of discretion and independent judgment, and the employee is primarily engaged in duties that consist of one or more of the following:
- The application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software, or system functional specifications
- The 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
- The documentation, testing, creation, or modification of computer programs related to the design of software or hardware for computer operating systems
- The employee is highly skilled and is proficient in the theoretical and practical application of highly specialized information relating to computer systems analysis, programming, or software engineering. A job title must not be determinative of the applicability of this exemption.
- The employee’s pay in 2023 is at least $53.80 per hour; or, if paid on a salary basis, they are paid at least $112,065.20 per year in monthly payments of at least $9,338.70 exclusive of board, lodging, and other facilities.
This exemption does not apply to the following employees:
- Trainees or employees in entry-level positions who are learning to become proficient in the theoretical and practical application of highly specialized information to computer systems analysis, programming, and software engineering
- Employees in a computer-related occupation but who have not attained the level of skill and expertise necessary to work independently and without close supervision
- Employees engaged in the operation of computers or in the manufacture, repair, or maintenance of computer hardware and related equipment
- Employees who are engineers, drafters, machinists, or other professionals whose work is highly dependent on or facilitated by the use of computers and computer software programs and who are skilled in computer-aided design software, including CAD/CAM, but who are not working as computer systems analysts or programmers
- Writers engaged in writing material, including box labels, product descriptions, documentation, promotional material, setup and installation instructions, and other similar written information, either for print or for on-screen media, or who writes or provides content material intended to be read by customers, subscribers, or visitors to computer-related media
- Employees performing otherwise exempt duties for the purpose of creating imagery for effects used in the motion picture, television, or theatrical industry
Pharmacist and Registered Nurse Exclusion
Pharmacists and registered nurses employed to engage in the practice of nursing are not exempt professional employees in California unless they meet the criteria for exemption as executive or administrative employees. Certified nurse midwives, certified nurse anesthetists, and certified nurse practitioners may qualify for the professional exemption.
In 2023, licensed physicians or surgeons are exempt from overtime if their hourly pay is equal to or greater than $97.99. The exemption does not apply to an employee in a medical internship or resident program. The Division of Labor Statistics and Research will adjust the rate of pay required for the exemption every year, to be effective the following January 1, by an amount equal to the percentage of increase in the California Consumer Price Index for Urban Earners and Clerical Workers (CA Lab. Code Sec. 515.6).
OUTSIDE SALES EXEMPTION
Under California law, an “exempt outside salesperson” means any person who is 18 years of age or older who customarily and regularly works more than half the working time away from the employer’s place of business selling tangible or intangible items or obtaining orders or contracts for products, services, or use of facilities. Outside salespeople do not need to meet the salary requirements that must be met by exempt executive, administrative, and professional employees in California.
INSIDE SALES EXEMPTION
California’s commissioned employee exemption applies to an employee whose earnings exceed 1 ½ times the minimum wage if more than half of that employee’s compensation represents commissions. Commission wages paid in one biweekly pay period may not be attributed to other pay periods to satisfy the commissioned employee exemption’s minimum earnings requirement.