By Kate McGovern Tornone

In its new overtime regulations, the U.S. Department of Labor (DOL) has more than doubled its salary threshold for the Fair Labor Standards Act's (FLSA's) white-collar overtime exemptions. This causes a rare circumstance in which federal law provides employees with more protections than California law. California has its own salary threshold—but it will be lower than the federal law once it takes effect on December 1, 2016. This has created a group of “gap” employees who fall between the two thresholds, according to some experts.

Under the new federal regs, employees must now—in addition to meeting a duties test—receive at least $913 per week to be exempt from overtime pay. This amounts to $47,476 annually.

According to DOL, about 392,000 workers in California will be affected.

California’s salary threshold

California has its own salary threshold, set at twice the hourly minimum wage of $10, which amounts to $41,600 annually. For employers with at least 26 employees, this will increase to $43,680 on Jan. 1, 2017, and, eventually, to $62,400 by 2022. (See chart, below.) Those with fewer employees have an extra year to comply.

Under both California and federal law, an employee also must pass a “duties test” to be considered exempt from overtime. The test is stricter in California, however, requiring that an employee spend at least 50% of his or her work time performing exempt duties.

Bonus compensation

The new federal regulation allows 10% of the $47,476 threshold to be made up of nondiscretionary bonuses. Bonuses must be paid at least quarterly.

In California, however, the threshold must be met with an employee’s base rate alone. This means that an employee could be properly classified as exempt under both laws in 2017 if he or she received a base rate of at least $43,680 plus $3,796 in bonuses.

Highly compensated employees

The new federal rule raised the FLSA’s highly compensated employee (HCE) exemption threshold from $100,000 to $134,004. To qualify for this exemption, employees must receive the $913 weekly base rate and meet a duties test. California, however, does not allow for an HCE exemption.

Employers’ options

Employers across the country have several options for dealing with the new rules, including salary increases, rate cuts and overtime limits, among other things.

In California, however, employers will find themselves dealing with what one law firm has called an “awkward ‘gap’ situation.” Employees who earn a salary between the state and federal thresholds—for 2017, that’s between $43,680 and $47,476—potentially could be classified as exempt under California law and nonexempt under the FLSA until the state threshold becomes higher than the federal in 2019.<./p>

In a client alert from Ogletree Deakins, the firm warned that maintaining such a situation would likely come with significant obstacles to compliance. “While such employees would not be entitled to daily overtime, meal and rest periods, or other minimum labor standards required under California law, such employees would still be entitled to overtime for all hours worked over 40 hours per week and the employer would have additional recordkeeping obligations under federal law,” wrote Robert A. Jones and Robert R. Roginson.

Another firm noted that California’s requirement that employees be paid overtime when they work more than 8 hours in a day would add another layer to that complex situation. “[California employers] who have employees that fall within this gap will need to adjust their current pay practices to begin tracking hours worked by these ‘gap’ employees and paying them overtime under federal law, which requires weekly, but not daily, overtime,” Aaron Buckley of Paul, Plevin, Sullivan & Connaughton LLP pointed out.

For tips on communicating classification changes to employees, see "7 steps for communicating employee transitions from exempt to nonexempt."

* Up to 10% of the threshold may be made up of nondiscretionary bonuses.
** May not include bonuses.