Paying Nonexempt Employees on Salary Basis Poses Risks for Employer
If I change a salaried exempt employee to salaried nonexempt, may that employee’s salary be less than the minimum threshold for a salaried exempt employee as long as I pay any overtime according to California labor laws?
Yes, you may establish a nonexempt salary level that is lower than the salary threshold for exempt executive, administrative and professional employees, which is two times the state minimum wage.
Risks to Consider
The real question is whether setting a salary level is a good choice considering that a nonexempt employee is paid by the hour and not by a pre-determined minimum salary.
Because the employee is still nonexempt, all laws that apply to hourly nonexempt employees also apply to salaried nonexempt employees, making a pre-determined set salary a very difficult practice to implement. The nonexempt salary must be established high enough to meet the applicable minimum wage rate in each pay period, such that it covers all hours worked within that pay period. Note that this rule is applicable to local minimum wage rates too.
Since nonexempt salaried employees are subject to the wage-and-hour laws, the employer must pay overtime, keep accurate time records, and provide meal and rest periods in accordance with the Industrial Welfare Commission (IWC) orders and the California Labor Code.
Because the employee is receiving a salary, compliance with these laws often is overlooked, resulting in labor claims for overtime and meal-and-rest break premiums. Moreover, these requirements make it difficult for a nonexempt employee to be paid on a salary basis because these variables may change the amount of pay owed in any one pay period.
In addition, salaried nonexempt employees’ pay stubs must show all hours worked and applicable hourly rates. Pursuant to Labor Code Section 515(d), the hourly rate is 1/40th the weekly salary. If, however, the salary agreement establishes a workweek of less than 40 hours, 35 hours for example, the hourly rate is 1/35th of the weekly rate.
Although it is extremely risky to pay a nonexempt employee on a salary basis, the Division of Labor Standards Enforcement policy manual has provided the following guidance regarding salaried nonexempt payment:
“In California, in a situation where a non-exempt employee is paid a salary, the regular hourly rate of pay for purposes of computing overtime must be determined by dividing the salary by not more than the legal maximum regular hours (in most cases 40 hours, but this may be less than 40 hours where daily overtime is being computed) to determine the regular hourly rate of pay. (See Labor Code § 515(d)) The contracted hours may be less than the legal maximum regular hours in one workweek, in which case the contracted hours must then be used as the divisor and the salary as the dividend to establish the regular hourly rate of pay. All hours over the legal maximum regular hours in any one workweek or in any one workday must be compensated at overtime rates.”
Keep in mind that the Labor Commissioner’s enforcement policies are not the law and oftentimes are ignored by the courts. Moreover, this answer does not discuss other issues, such as demotion and reduction in salary as a disciplinary action. In short, paying a nonexempt employee on a salary basis is risky business for any employer and a practice that may not be worth the risk.
Review HRCalifornia.com for more information surrounding these issues.