California employers will need to review and confirm their employees’ exempt status and non-exempt hourly wage rates before the start of the new year because of an unusual change in the statewide minimum wage applicable to all California employees.

On July 27, 2022, the California Director of the Finance Department sent a letter to Governor Gavin Newsom stating that the minimum wage will be raised by $15.50 for all employers, regardless of headcount, on January 1, 2023. This change may take employers by surprise because the new minimum is higher than the scheduled increases published by the California Department of Industrial Relations, and applies regardless of employer size.

Most California employers are likely familiar with the Schedule for the California Minimum Wage rate 2017-2023 (see below) published on the California Department of Industrial Relations website.

However, this schedule is no longer accurate. A little-known provision of the California Labor Code (Cal. Lab. Code Section 1182.12) requires the Director of the Department of Finance to determine, each year, whether the minimum wage must be adjusted because of inflation. The mechanism takes into account the latest Consumer Price Index as set by the Bureau of Labor statistics. When inflation exceeds 7%, the minimum wage becomes the same for all employers, regardless of headcount, effective the following January 1. After determining that the US States Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) for the 12-month period from July 1, 2021 to June 30, 2022 increased by 7.9 percent compared to the 12-month period from July 1, 2020 to June 30, 2021, the Director certified a new minimum wage of $15.50/hour for all employers starting January 1, 2023.

This change will require California employers to increase the hourly rates paid to minimum-wage employees. It also will impact payments that are tied to the state minimum wage, such as split-shift premiums, certain overtime exemptions for CBA-covered employees, and non-productive time for piece rate workers.

But most importantly, the increase of the minimum wage will impact the minimum base salary required for the so-called “white collar” exemptions:

• Certain white-collar exemptions in California rely, in part, on the minimum wage: in addition to performing tasks and duties in line with the executive, administrative, and professional exemptions, most white-collar employees must earn at least twice the applicable minimum wage for full-time employment (40 hours per week) (i.e., currently for larger employers, at least $62,400 annually). By contrast, the federal Fair Labor Standards Act requires all exempt employees be paid at least $684 per week (at least $35,568 annually) in order to be exempt from overtime. The increase in the minimum wage to $15.50 next year will raise the minimum salary level to $64,480.
• Similarly, under California law, commissioned inside salespeople are exempt from overtime if, among other things, they earn more than half of their compensation from commissions (measured over different time periods) and at least 1.5 times the minimum wage (on a workweek-by-workweek basis).

And California is not an anomaly. At least a dozen other states–including Illinois, New Jersey and Virginia–are raising their minimum wage in 2023. Most states have mechanisms to raise their minimum wage based on inflation or other similar indices (such as the cost of living, employment costs, etc.). We expect to see more states and localities raise their minimum wage rates higher or earlier than anticipated.

US employers should prepare for possible increases and conduct a review now to determine whether impending new minimum wage rates may change the exempt status of employees or require raising salary levels. A prompt review will give employers time to decide whether they wish to treat formerly exempt employees as non-exempt employees starting January 1, 2023, or whether they prefer to adjust affected exempt employees’ base compensation to ensure those employees continue to qualify for the applicable exemption. For assistance with California’s new minimum wage rates and their impact on the exempt status of your employees, and for all of your employment needs, contact your Baker McKenzie employment attorney.