Overtime

Under President Obama, the Department of Labor issued new overtime rules in 2016 that changed the minimum salary required for employees to be exempt under the Fair Labor Standards Act (FLSA). But before those rules could take effect, a federal court enjoined the new rule, preventing it from taking effect. While the appeal on that case was pending, the Department of Labor proposed a new rule with a minimum salary requirement from $35,308 ($679 per week) instead of the $47,476 minimum salary ($931 per week) issued under the Obama administration. The new rule has not yet been approved but will likely be approved soon and will probably take effect in 2020. Among other things, the new rule:

• Increases the minimum salary required for an employee to qualify as FLSA exempt from the currently-enforced level of $455 to $679 per week (equivalent to $35,308 per year).
• Increases the total annual compensation requirement for “highly compensated employees” (HCE) from the currently-enforced level of $100,000 to $147,414 per year.
• Does not include automatic adjustments to the salary threshold, but the DOL has given its commitment to periodically review the salary threshold. Any update would continue to require notice-and-comment rulemaking.
• Allows employers to use nondiscretionary bonuses and incentive payments (including commissions) that are paid annually or more frequently to satisfy up to 10 percent of the standard salary level.

In a blog post today, Labor Secretary Tom Perez announced that the DOL had finished drafting updates to Federal overtime regulations.

The proposed regulations have not yet been released, but they are widely expected to include changes to the minimum salary employers must pay to workers properly classified as “exempt” from overtime pay. Currently, Federal law requires eligible employees earn a minimum salary of $455 per week, or $23,660 per year in order to qualify as “exempt” from Federal overtime pay.

The California Supreme Court published its opinion this week in Peabody v. Time Warner Cable, (2014) 59 Cal.4th 662, wherein it addressed the following question:

May an employer, consistent with California‟s compensation requirements, allocate an employee’s commission payments to the pay periods for which they were earned?

Peabody worked as a sales person for Time Warner, and claimed she was not paid minimum wages and overtime. Time Warner did not dispute that Peabody regularly worked 45 hours per week and was paid no overtime. It argued that she fell within California’s “commissioned employee” exemption and thus was not entitled to overtime compensation. (Cal. Code Regs., tit. 8, § 11040, subd. 3(D).) The exemption requires, among other things, that an employee’s “earnings exceed one and one-half (1 1/2) times the minimum wage” (ibid.), i.e., $12 per hour. Time Warner acknowledged that most of Peabody’s paychecks included only hourly wages and were for less than that amount. It argued, however, that her commission wages should be averaged across all pay periods to satisfy the $12 per hour requirement – and not simply allocated to the period in which they were actually paid. Time Warner also relied on this argument in defense of Peabody’s minimum wage claims.

The California Supreme Court disagreed.

We next consider Time Warner’s contention that commission wages paid in one biweekly pay period may be attributed to other pay periods to satisfy the exemption’s minimum earnings prong. Specifically, Time Warner argues that Peabody’s commissions, which were always paid on the final biweekly payday of each month, should be attributed to the weeks of the preceding month. For example, it contends the $2,041.33 in commission wages it paid on November 26, 2008, should be attributed to the four workweeks of October 2008. Time Warner’s ability to satisfy the minimum earnings prong hinges on its ability to attribute commissions in this way. We conclude it may not do so. Whether the minimum earnings prong is satisfied depends on the amount of wages actually paid in a pay period. An employer may not attribute wages paid in one pay period to a prior pay period to cure a shortfall.

The ruling affirms the DLSE enforcement policies on this issue and again rejects deference to the Federal rule allowing wages to be averaged. The court went on to note that reallocating wages to a period when they were not actually paid would be inconsistent with Labor Code section 204 (requiring regular, periodic paydays) and section 226 (requiring wage stubs state the amount of wages earned per pay period).

Notably, the court emphasized the policy reasons behind the minimum wage laws and found that Time Warner’s reallocation practice would undermine those policy objectives:

This interpretation narrowly construes the exemption’s language against the employer with an eye toward protecting employees. (Ramirez v. Yosemite Water Co., supra, 20 Cal.4th at pp. 794-795.) It is also consistent with the purpose of the minimum earnings requirement. Making employers actually pay the required minimum amount of wages in each pay period mitigates the burden imposed by exempting employees from receiving overtime. This purpose would be defeated if an employer could simply pay the minimum wage for all work performed, including excess labor, and then reassign commission wages paid weeks or months later in order to satisfy the exemption’s minimum earnings prong.