The executive pay exemption is one of three so-called “white-collar” pay exemptions that exempts certain employees from state and/or federal overtime, minimum wage, and meal and rest break requirements. Meagan Bainbridge and Lukas Clary review this exemption in part 2 of this 4-part pay exemption series on California Employment News.
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Hello, everyone. Thank you for joining us for this installment of California Employment News, an informative video and podcast resource offered by the labor and Employment Group at Weintraub Tobin. My name is Meagan Bainbridge, and I’m a shareholder in the Firm’s labor and employment group. Today, I’m joined by my partner, Lukas Clary, and we will be discussing the executive exemption and a new case out of the United States Supreme Court. Lukas, let’s start at the beginning. What is the executive exemption?
Thanks, Meagan. So, the executive exemption is one of the three so-called white collar exemptions. These are exemptions from federal and state laws entitling employees to, for example, overtime, minimum wage, and, in California, meal and rest breaks. Certain employees are exempt from those requirements if they meet the applicable test for the exemption. Now, the executive exemption applies to certain managing employees whose job entails running the company or at least a customarily recognized subdivision of the company. There are criteria that must be met for the exemption to apply. While those criteria vary in nuanced ways, depending on whether you’re applying federal or California law, some aspects are common of both. For example, the executive must customarily direct the work of at least two or more full time employees. They must have the authority to hire and fire, or at least make recommendations on hiring and firing that are afforded significant weight. They must also be paid on a salary basis, and depending on federal or state law, that salary must be a minimum amount. It is that last point, the salary basis, that has been scrutinized in a recent Supreme Court opinion. Meagan, can you tell us about that?
Yeah. So, in Helix Energy Solutions Group, Inc. vs. Hewitt, the Supreme Court clarified that employees who are paid a daily rate likely do not qualify for the executive exemption. Under the FLSA, Mr. Hewitt worked for Helix as a tool pusher on an offshore oil rig. He typically worked more than 80 hours a week. For this work. He earned over $200,000 a year. But he was paid a set daily rate with no overtime compensation. Mr. Hewitt argued that because the daily rate did not offer him a minimum guaranteed weekly pay, rather he was paid just for the days he worked, the salary basis test could not be met. The majority of the court agreed with him that the daily rate employee does not meet the salary basis test found in the language of the FLSA, where there’s no weekly minimum guaranteed pay. So, Lukas, what does this mean for employers?
So, for starters, it means that employers must pay management employees at least a weekly set salary if they’re going to be classified as exempt. A daily rate will not work. Now, that salary also has to be above a certain minimum, as I mentioned earlier. And this is one area where California and federal law differ. So, in California, that minimum salary must be equivalent to double the minimum wage earned by a full-time employee, which is someone who works 40 hours per week. So, given California’s current minimum wage of $15.50 per hour, this means an employee must earn at least $1,240 per week, which is $31 an hour times 40 hours, to be eligible for the executive exemption. Another key distinction between California and federal law on this topic is that California utilizes a quantitative rather than qualitative analysis. In other words, whereas the FLSA federal law test asks whether the employee’s primary duty is to manage the enterprise or recognized subdivision, California law asks whether the employee is doing so, managing at least 50% of the time. If not, they will not qualify for the exemption, even if all other criteria are met. Given these nuances, Meagan, I do recommend employers considering classifying an employee as exempt work with legal counsel to ensure they are doing so correctly.
Thanks, Lukas. That’s good advice. And that does it for today. Thank you for joining us. On the next episode, we’re going to continue with our series on exemptions and focus on the administrative and professional exemptions. You can continue to find California employment news on our blog at theleblog.com and wherever you listen to your favorite podcasts. We’ll see you next time.