On September 25, 2013, California Governor, Jerry Brown, signed a bill (Assembly Bill No. 10) that will raise the hourly minimum wage up 25% over the next few years.  First, the minimum wage will increase in less than one year, on July 1, 2014, from $8.00 per hour to $9.00 per hour, and then only one and one-half years later, on January 1, 2016, up another one dollar to $10.00 per hour.  This new law – which amends Labor Code section 1182.12 – creates the first increase to California’s minimum wage in six years.  Not only will the new law increase the take-home pay for many non-exempt hourly workers in California, but employers need to be mindful of the new law’s impact on lower-salaried exempt employees and other potential pitfalls.

The enactment of A.B. No. 10 potentially could lead to the filing of an increased number of lawsuits in the wage-and-hour area.  In that regard, exempt employees may seek to bring misclassification claims, as a result of employers failing to utilize the new minimum wage rate to properly pay the employees high enough compensation to meet the salary-basis test of the applicable exemptions.  California Labor Code section 515 requires exempt employees to receive a salary of at least twice the minimum wage for full-time employment on a monthly basis.  Under the new law, the minimum salary for an exempt employee will increase from $33,280 a year to $37,440 a year by July 2014, and then up to $41,600 by January 1, 2016.  While most employers currently pay exempt workers more than the minimum salary amount, companies that pay the minimum salary and fail to increase the salary level of their exempt employees after the increase to California’s new minimum wage rate could be confronted with a misclassification lawsuit.  Consequently, if an employer is found to have misclassified an exempt employee for violating the salary-basis rules, then the employee potentially could recover, among other things, several years’ worth of overtime pay and other compensation and penalties, including for missed meal periods and rest breaks.  Thus, it is very important that employers pay exempt employees the minimum base monthly salary, based on the new minimum wage rates, when they become effective, or otherwise these employers risk jeopardizing the exemption protections.

In addition to misclassification issues, employers also will need to keep in mind that overtime rates, vacation payments, and missed meal and rest period premium payments, all will be higher in light of the minimum wage hike.  Companies and other employers that fail to account for these changes likely will open themselves up to be sued for such wage-and-hour violations.

We encourage all employers to review their compensation practices before the new law, and the enactment of A.B. No. 10, goes into effect on July 1, 2014, to ensure compliance with applicable California law.