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From Salary Reviews to Paid Parental Leave: A Mid-Year Compliance Checklist

1.  Review Salaries for Compliance with Updated FLSA Overtime Exemption Requirements 

Beginning on December 1, 2016, the minimum salary to qualify for the Administrative, Professional and Executive overtime exemption classifications under the federal Fair Labor Standards Act (FLSA) will be $913 per week (equating to $47,476 on an annualized basis). These changes are required by federal regulations that were recently finalized. The new minimum salary is tied to the 40th percentile of weekly earnings for full-time salaried workers in the lowest-wage census region.

Ten percent of the minimum salary, or $4,747, may be comprised of nondiscretionary bonuses and incentive payments (including commissions) so long as they are paid on a quarterly or more frequent basis. Nondiscretionary bonuses are those that are promised to employees when certain production, sales or retention goals are reached. In contrast, a discretionary bonus is awarded at the sole discretion of the employer.

If employees have not earned a sufficient amount of incentive compensation in a quarter that will bring their total pay to the minimum salary requirement, employers may make a “catch-up” payment at the end of the quarter. The employer has one pay period to make this payment.

The new regulations also increased the FLSA’s “highly compensated employee” exemption minimum salary to $134,004 per year. Up to $86,528 may be paid via nondiscretionary bonus or other incentive compensation so long as the employee is paid at least $913 per week.

The regulations have set up a mechanism for automatically updating the salary and compensation levels every three years to ensure that they continue to keep pace with economic developments.

Some small businesses and non-profit organizations may not be subject to any of the FLSA’s requirements if they do not meet the threshold for annual revenue (less than $500,000 per year) or employees are not engaged in any interstate commerce (e.g., nothing the employee does or produces crosses state lines, including no phone calls, emails or internet usage). There are various special salary levels for certain industries (e.g., motion picture industry) and some limited exceptions to the salary requirements. Seek legal counsel to determine if any of these specific items apply to your organization.

Although these regulations focus only on the minimum salary requirements, keep in mind that all of the overtime exemption classifications require employees to perform certain duties. Thus, paying the minimum salary satisfies only part of the requirement.

2. California Employers Must Ensure Compliance with FLSA’s Requirements

Employers who have employees in California must comply with both the California and FLSA overtime exemption requirements. The FLSA’s new minimum salary requirement exceeds the California minimum salary to qualify for its overtime exemptions, which is currently $41,600. The California minimum salary is calculated by multiplying 2,080 (signifying a full-time employee’s typical annual hours) by two times the state minimum wage. Since this amount is less than the FLSA’s minimum, California employees must be paid at least $47,476 annually to qualify for the Administrative, Professional or Executive exemption. Pursuant to recent legislation, the California minimum wage will be increasing each year. However, for the next several years, the minimum wage will not result in a minimum salary that exceeds the FLSA amount.

The FLSA “highly compensated employee” exemption is not recognized in California. Various states do not recognize this exemption and thus, employers should ensure that the appropriate exemption classifications are being relied upon.

Employers in California must also keep in mind that some of the mechanisms recognized under the FLSA for complying with overtime pay arrangements are not sanctioned under California law. California law has no threshold requirements for coverage as the FLSA does (i.e., there is no minimum revenue or connection to interstate commerce requirement).

3. Prepare for San Francisco Employees to Receive Paid Parental Leave

Beginning on January 1, 2017, employers with 50 or more employees must pay “covered employees” who are taking new child bonding time off by supplementing the California Paid Family Leave program benefits for up to six weeks. This requirement is phased in over time for smaller employers as follows. Employers with 35 or more employees must comply on July 1, 2017 and those with 20 or more employees must do so on January 1, 2018. As with other San Francisco ordinances, all employees regardless of their work locations are counted towards the total to trigger the compliance obligation.

To be covered by the law, employees must be employed for at least 180 days prior to the start of their leave of absence, perform at least eight hours of work per week, work at least 40% of their total weekly hours in San Francisco, and be eligible to receive the California Paid Family Leave benefits for new child bonding.

If the employee and employer are covered by the ordinance, the employer must provide supplemental compensation during the leave of absence period in an amount that will equal 100% of the employee’s gross weekly wage to make up the difference with the California Paid Family Leave benefits received. These benefits generally equate to 45% of employees’ salaries. However, the Paid Family Leave benefits are capped at the weekly amount of $1,129 that is based on an annual salary of $106,740.  Under the ordinance, employers’ obligations are capped for those earning more than $106,740, which means the weekly supplemental compensation owed to such employees would be based on the maximum salary cap used by the EDD. Please note that Governor Brown recently signed new legislation that will increase the weekly benefits paid by the California Paid Family Leave program.  This will mean a decrease in the employer’s payment obligation under the ordinance.

As a condition of receiving the supplemental compensation, employers may require employees to use up to two weeks of accrued vacation leave or paid time off to help satisfy the employer’s obligation. This is in addition to the Paid Family Leave regulations that allow an employer to apply up to two weeks of accrued vacation leave or paid time off before the employee becomes eligible to receive Paid Family Leave benefits.

Employers may require an employee to repay the employer for the full amount of supplemental compensation paid if the employee voluntarily separates from employment within 90 days from the end of the employee’s leave period.

Reducing an employee’s wages within 90 days of the employee applying for Paid Family Leave benefits creates a rebuttable presumption that such an action was intended to reduce the amount of supplemental compensation required.

Employers with less than 50 total employees are not covered by the federal Family and Medical Leave Act (FMLA) or the California Family Rights Act (CFRA), and thus are not required by these laws to provide leaves of absence for new child bonding time. Paid Family Leave is a wage replacement benefit and not a leave of absence requirement. Thus, employers with less than 50 employees need to determine if their policy will provide such leaves of absence, which in turn would trigger the paid parental leave obligation.

For more information or assistance with employment law compliance matters, please contact Ms. Topliff at topliff@joblaw.com.

Mary L. Topliff, Esq. ©2017 Mary L. Topliff. For more information, contact Mary at topliff@joblaw.com. This article may not be copied or reproduced without the express permission of Mary L. Topliff.