This article originally appeared in “Citations” magazine, a publication of the Ventura County Bar Association.

On Monday, April 4, Governor Jerry Brown signed Senate Bill 3, which increases California’s minimum wage by 50 percent over the next five years. Employers, and those who advise them, need to be aware of the effects this will have in their workplaces.

A number of California cities, including San Francisco, Los Angeles and Santa Monica, had already approved gradually raising of their minimum wages to $15 an hour. However, California is the first state in the nation to raise the minimum wage to $15 per hour statewide. California employers must comply with the state’s minimum wage, rather than the lower federal minimum wage (currently $7.25 per hour).

As of Jan. 1, California’s minimum wage is $10 per hour. The additional increase in will happen gradually and at different rates for larger and smaller employers.

For employers with 26 or more employees, SB 3 provides for an increase of $0.50 per hour effective Jan. 1, 2017 and an increase of another $0.50 per hour commencing Jan. 1, 2018. Thereafter, the rate will increase $1 per hour each year until 2022, at which time it will be $15 per hour.

Smaller employers (25 or less employees) will begin the scheduled increases one year later, on Jan. 1, 2018, and will be at $15 per hour as of Jan. 1, 2023.

Once the minimum wage reaches $15 per hour for all businesses, the Director of Finance will continue to adjust the minimum wage annually for inflation, pursuant to a specified formula that could continue to increase the minimum wage up to 3.5 percent (rounded to the nearest $0.10) each year.

Until the minimum wage reaches $15 per hour for all employees, the Governor has discretionary authority to temporarily suspend minimum wage increases for a one year period based upon current economic conditions. The Governor may suspend scheduled minimum wage increases no more than two times.

Exempt employees
Although the increase in the minimum wage will have the greatest impact on minimum wage workers, it will also affect exempt employees and many commissioned salespeople.

California imposes a two-part test to determine whether or not an employee may be classified as exempt from many of the requirements of the Labor Code. To qualify under the administrative, executive or professional exemption, the employee must (1) be “primarily engaged” in duties that qualify for the exemption, and (2) earn a monthly salary equal to twice the equivalent of full-time minimum wage employment. An employee loses their exemption if they perform the duties of the exemption but fail to satisfy the salary test.

Currently, an exempt employee must earn at least $3,466.67 per month, or $41,600 per year. The minimum salary for an exempt employee will continue to increase incrementally as the minimum wage increases year by year. By the time the minimum wage reaches $15 per hour, exempt employees in California must be earning a monthly salary of at least $5,200, and an annual salary of no less than $62,400.

Employers must be mindful of the effect minimum wage increases have on their exempt employees and ensure that exempt employees’ salaries are increased accordingly to satisfy the salary test during each annual minimum wage increase. Otherwise exempt employees will lose their exemption if their salary falls below the minimum requirements of the salary test, thereby exposing the employer to liability for unpaid overtime, missed meal and rest breaks, and other violations of the Labor Code.

The minimum wage increase also impacts the inside salesperson exemption. Pursuant to Wage Orders 4 and 7, employees whose earnings exceed one and one-half times the minimum wage, and receive more than half of their compensation from commissions, are exempt from the overtime requirements of the Labor Code. Currently, to be exempt from overtime, inside salespeople must earn at least $15.01 per hour. The minimum hourly rate for qualified salespeople will continue to increase annually as the minimum wage increases. By the time the minimum wage reaches $15 per hour for all employees, inside salespeople must be earning at least $22.51 per hour to continue to be exempt from overtime requirements. Outside salespeople do not need to meet the minimum salary requirements.

The obligation to pay minimum wage cannot be waived by an agreement between the employer and employee, including a collective bargaining agreement. Furthermore, it applies to all employees who are based in California and out-of-state employees working temporarily in the state.

Notice requirements
California employers are required to post the official Minimum Wage Order in a conspicuous location frequented by employees. The most recent notice includes the increase that went into effect Jan. 1; however, a new notice will be needed for 2017.

Labor Code section 226(a) provides that every employer shall furnish employees with an accurate itemized statement, at the time wages are paid, setting forth wages earned, total hours worked, etc. 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. Employers will need to ensure that wage statements are accurate, otherwise they may face statutory penalties.

Labor Code section 2810.5 went into effect on Jan. 1, 2012 and requires that employers provide notice to non-exempt employees at the time of hire that includes their rate(s) of pay, designated pay day, the employer’s intent to claim allowances (meal or lodging allowances) as part of the minimum wage, and the basis of wage payment (whether paying by hour, shift, day, week, piece, etc.), including any applicable rates for overtime. An additional written notice must be provided within seven calendar days after a change is made to any information in the notice; however, a separate wage notice is not required if the change is only to the employee’s rate of pay, and the change is reflected on a timely itemized wage statement. Employers subject themselves to liability if they fail to provide this notice to new employees.

There are often hidden consequences to changes in the Labor Code. Employers must be prepared to adjust their compensation levels to comply with the new minimum wage requirements and should audit the pay rates of exempt and inside sales employees on a annual basis. Furthermore, employers need to ensure they comply with all related notice requirements.