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On January 1, 2016, California’s minimum wage will increase to $10 per hour from the existing minimum wage of $9 per hour.

Employers need to prepare for the minimum wage increase. Also, employers should remember that state enforcement agencies have made it a top priority to stop employers from engaging in so-called “wage theft,” which includes not paying the minimum wage for all hours worked.

Employers will want to examine all pay practices that might be affected by the minimum wage increase. Hint: There are more than you might think!

•  Minimum Wage
•  Overtime Rate
•  Exempt/Nonexempt
•  Notice Requirements
•  Meals and Lodging
•  Piece-Rate Employees
•  Draws Against Commissions
•  Tools/Equipment
•  Subminimum Wage

Minimum Wage

California employers must pay employees no less than the state minimum wage per hour for all hours worked. The federal minimum wage is $7.25 per hour, but when state and federal laws differ, employers must comply with the more restrictive requirement. Since California’s state minimum wage is higher, most employers will be required to pay that rate.

The obligation to pay the minimum wage can’t be waived by any agreement, including collective bargaining agreements.

But the state minimum wage increase does not affect only your nonexempt workers who receive the minimum wage; the increase also affects your classification of employees as exempt versus nonexempt and creates other ramifications.

Overtime Rate

The minimum wage rate change affects overtime. Effective January 1, 2016, employees who work for minimum wage and perform work that qualifies for overtime must be paid $15 per hour for time and one-half or $20 per hour for double-time.

This is an increase from the pre-January rates of $13.50 per hour (time and one-half) or $18 per hour (double-time).

Exempt/Nonexempt

Employers should be mindful of the effect of the minimum wage increase on exempt/nonexempt classifications and ensure that employees meet the salary basis test for the particular exemption claimed.

For an employee to meet a “white collar” exemption from overtime (the commonly used administrative, executive or professional exemptions), he/she generally must earn a minimum monthly salary of no less than two times the state minimum wage for full-time employment, in addition to meeting all other legal requirements for the exemption.

Effective January 1, 2016, the minimum salary requirements for these exemptions will increase to $3,466.67 per month (or $41,600 annually) from $3,120 per month (or $37,440 annually).

Also, certain commissioned inside sales employees under Wage Orders 4 and 7 can be eligible for an overtime exemption. Generally, the exemption applies if the employee earns more than 1.5 times the minimum wage each workweek, and more than half of the employee’s compensation represents commission earnings.

Employers will need to make sure that commissioned inside sales employees continue to meet this test after the January 1 minimum wage increase. Outside salespeople do not need to meet the minimum salary requirements.

Notice Requirements

The minimum wage increase affects employer notice requirements related to the minimum wage posting, itemized wage statements and wage notices.

First, employers must post California’s official Minimum Wage Order (MW- 2014) in a conspicuous location frequented by employees. The official notice includes the increase for January 1, 2016.

Second, California employers must provide each employee with an itemized statement, in writing, at the time wages are paid (Labor Code Section 226). Among other mandatory information, the itemized wage statement must include all applicable hourly rates in effect during the pay period and the corresponding number of hours the employee worked at each hourly rate.

Third, employers in California must provide nonexempt employees with a wage notice pursuant to Labor Code Section 2810.5. The written notice must be provided at time of hire and again within seven calendar days after a change is made to any information in the notice. Among other things, employers are required to notify nonexempt employees, in writing, when there is any change to:

•  The employee’s rate of pay;
•  Any overtime rates of pay; and
•  Any allowances, such as meal or lodging allowances, claimed as part of the minimum wage (Labor Code Section 2810.5).

NOTE: If an employee’s rate of pay will increase on January 1, 2016 due to the minimum wage increase, the employee must receive notice from his/her employer by January 7, 2016. The separate wage notice is not required if the employer has reflected the change on a timely itemized wage statement, if the statement meets all legal requirements.

Meals and Lodging

Most of California’s Wage Orders allow employers to credit meals and lodging furnished by the employer toward the employer’s minimum wage obligation (Section 10 of the Wage Orders). The new credit amounts for meals and lodging are listed on the official Minimum Wage Order (MW-2014).

Piece-Rate Employees

The minimum wage increase also affects piece-rate employees. Piece-rate workers must receive at least minimum wage for each hour worked. Legislation effective January 1, 2016, requires payment of rest and recovery periods or other nonproductive time at specified hourly rates (AB 1513).

Draws Against Commissions

A commissioned employee can receive a sum of money that is intended as an advance, draw or guarantee against the employee’s expected commission earnings.

In California, employers must pay these sums at least twice per month. If an employee receives a draw against commissions to be earned at a future date, the “draw” must be equal to at least the minimum wage and overtime due to the employee for each pay period (unless the employee is exempt).

Tools/Equipment

When an employer requires that employees use certain tools or equipment or when the tools or equipment are necessary to perform the job, the employer must provide and maintain the tools or equipment.

However, employees whose wages are at least two times the minimum wage can be required to provide and maintain hand tools and equipment customarily required by the trade or craft in which they work.

Subminimum Wage

There is no distinction between adults and minors when it comes to paying the minimum wage.

A limited exception exists for “learners,” but that exception is not dependent on age. “Learners” are employees who have no previous similar or related experience in the occupation. California’s Wage Orders permit you to pay learners 85 percent of the minimum wage, rounded to the nearest nickel. State law allows the subminimum wage to be paid for only the first 160 hours of work, after which the employee must be paid at least minimum wage.

The subminimum wage rate will increase to $8.50 per hour (from $7.65 per hour) effective January 1, 2016. Federal and state laws provide different definitions of learners. California employers must be careful to comply with both federal and state subminimum wage requirements and give employees the benefit of whichever law is more favorable to them.

In most instances, California requirements provide a greater benefit to the employee than federal requirements, and employers must comply with the California law.

Best Practices

•  Display a poster that includes the current official Minimum Wage Order (MW-2014). CalChamber’s 2016 California and Federal Employment Notices poster already includes the required minimum wage update.
•  Update any necessary payroll documentation.
•  Review exempt classifications to make sure that the employees will still meet the minimum salary requirements on January 1, 2016.
•  Provide revised itemized wage statements in a timely manner when wages are paid and ensure the statements accurately reflect the new minimum wage increase.
•  Provide employees affected by the minimum wage increase with an appropriate wage notice showing the change in the rate of pay, if required.
•  Adjust any meal or lodging credits to meet the new minimum wage obligation.
•  Review any piece-rate compensation systems to ensure compliance with the new minimum wage standard and new legislation.
•  Review commissioned employee arrangements to make certain that any draws against future commissions use the new minimum wage rate as a basis.
•  Confirm that those employees who are required to provide and maintain their own hand tools and equipment earn at least two times the minimum wage (which will equal $20 per our effective January 1, 2016).
•  If you use the “learner” rate, ensure that you follow the strict guidelines for when you can pay the lower rate and use the appropriate rate calculation beginning January 1, 2016. Keep accurate records of time worked; after the employee reaches 160 hours of work, you may not pay the subminimum wage to the employee.
•  Remember that local ordinances may affect your minimum wage obligations. For example, San Francisco currently requires a minimum wage of $12.25 per hour and San José currently requires a minimum wage of $10.30 per hour. Note, however, that exempt/nonexempt classification is based on the state minimum wage, not local ordinances.

Article from CalChamber HRcalifornia extra e-Newsletter, “California’s Upcoming Minimum Wage Increase – Review Your Practices,” November 12, 2015.