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Can a California employer avoid paying overtime by paying an employee a salary?

Many California employers mistakenly believe that they can avoid paying employees overtime, because their employees are paid a salary instead of an hourly wage. This misunderstanding may come from the fact that employees may be exempt from overtime if they meet two criteria. The first requirement is that the employee must be paid a salary equal to or greater than twice the state minimum wage for a forty hour workweek. The second requirement is that the employee must be primarily engaged in executive, administrative, or professional duties. The California Department of Industrial Relations website explains these duties in greater detail.

Engaged in Exempt Task

An employee must be primarily engaged in certain duties to qualify for one of the three main exemptions. The term primarily engaged in means that more than one-half of the employee's work time is spent engaged in exempt work. In other words, if an employee spends more than half of his or her time on nonexempt task, the employee does not meet this prong of test to determine whether an employee is classified as exempt. This is an area that is often overlooked by employers.

Furthermore, it is important to note that an employee must meet the underlying criteria of being engaged in exempt functions. Many employers run afoul with the law, because they believe that an employee is engaged in exempt duties when the employee is, in fact, not engaged in exempt duties. For example, according the California Department of Industrial Relations, employees are frequently misclassified under the administrative exemption, because they fail to meet the requirement that they customarily and regularly exercise discretion and independent judgment. “This phrase means the comparison and evaluation of possible courses of conduct and acting or making a decision after the various possibilities have been considered. The employee must have the authority or power to make an independent choice, free from immediate direction or supervision and with respect to matters of significance. With respect to the administrative exemption, this phrase has been most frequently misunderstood and misapplied…” For example, if an employee is primarily engaged in a production aspect of the business or merely applies techniques, procedures, or specific standards provided by the employer, then the employee does not meet this prong of the test. It is important to thoroughly analyze all aspects of the duties requirement to determine if an employee is actually engaged in exempt duties.

Burden to Prove Exempt Status

If an employer contends that an employee qualifies under an exemption, it is the employer’s burden to prove that the employee is exempt. Therefore, employers should think twice before asserting that an employee is exempt from overtime. If the employer is unable to establish that the employee is exempt, the employee will be entitled to compensation for any overtime worked as well as any meal and rest break premiums owed. Employer’s should thus be cautious when classifying employees as exempt or paying them on a salaried basis. It should be noted that an employer may still pay a nonexempt employee a salary; however, that salary will only compensate the employee for the non-overtime worked by the employee.

Employer Penalties and Employee’s Recovery

Employees who are owed overtime compensation may pursue legal action against an employer for unpaid overtime under California Labor Code Sec. 1194. Employees are also frequently entitled to additional penalties under the California Labor Code and other applicable statutes. These penalties may include waiting time penalties under California Labor Code Sec. 203, penalties for wage statement violations, as well as several other penalties that are potentially applicable under the individualized facts one’s case.

The statute of limitations for unpaid overtime claims is three years. However, employees may seek an additional year of unpaid overtime under California’s Unfair Competition Law. As such, employees can frequently seek unpaid overtime going back four years.

Our firm represents both employees and management in matters related to employee misclassification. As such, we assist employees recover unpaid wages, and we also help employers protect themselves when such claims are asserted or help employers understand the law and put in place good systems to prevent potential future legal liability. Please contact us to see how we can assist you.

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