Salary basis requirements for exempt employees under Labor Code §515
STATE OF CALIFORNIA GRAY DAVIS, Governor
DEPARTMENT OF INDUSTRIAL RELATIONS
DIVISION OF LABOR STANDARDS ENFORCEMENT
Headquarters Office
P.O. Box 420603
San Francisco, CA 94142
(415) 703-4810
Arthur S. Lujan
(415) 703-4807 fax
Office of the
State Labor Commissioner
March 1, 2002
Bill Dombrowski, Chairman
Industrial Welfare Commission
770 L Street, Suite 1170
Sacramento, CA 95814
Re: Salary Requirements For Exempt Employees
Dear Mr. Dombrowski:
This letter responds to the your inquiry regarding the enforcement position
of the Division of Labor Standards Enforcement ("DLSE") regarding the salary
requirements for exempt status under California law. Prior to the enactment of AB 60
(the "Eight-Hour-Day Restoration and Workplace Flexibility Act of 1999"), the DLSE
determined that the salary requirements of state law were generally consistent with the
federal "salary basis" regulations set forth in 29 C.F.R. § 541.118. The DLSE does not
interpret AB 60 or the wage orders issued by the Commission in 2000 or 2001 to require a
change in this enforcement position. In fact, as explained below, the Labor Code and the
wage orders plainly support this conclusion.
In order to explain the position set forth in this advice letter, it may be
helpful to explain the DLSE's prior position on this subject, the effect of the statutory
provisions added by AB 60 and SB 88, and the wage orders issued subsequent to January
1, 2000, AB 60's effective date. Each of these subjects is reviewed below.
1. DLSE's Enforcement Position Prior To AB 60
An examination of the wage orders in effect prior to 2000 reveals that the
concept of a "monthly" compensation system was not introduced by AB 60 or the wage
orders that became effective on October 1, 2000. Rather, the wage orders required that
exempt employees receive "remuneration" in excess of specified levels "per month" for
many decades. Although the Commission increased the amount of the monthly
remuneration periodically as it determined appropriate (e.g., from $900 to $1,150 per
month), the monthly remuneration standard remained unchanged. In short, the monthly
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compensation concept is not new. While Labor Code Section 515(a) refers
to "monthly salary" instead of monthly remuneration, the concept of a monthly sum was
well established long before AB 60 incorporated the concept within Section 515.
It is also clear that the DLSE had definitively construed the monthly
remuneration standard prior to AB 60's effective date to require a salary that was
consistent with that required under the Fair Labor Standards Act ("FLSA"). For example,
the DLSE construed the standard in 1997 and 1998 in a manner that was generally
consistent with the federal "salary basis" regulations set forth in 29 C.F.R. § 541.118.
The DLSE's Chief Counsel wrote an advice letter to Attorney Richard Simmons dated
April 28, 1997, which expressed the opinion that the monthly remuneration requirement
of the wage orders
"is met when under the employment agreement the worker
receives each week a predetermined sum constituting all or
part of his compensation which predetermined amount is
not less than the remuneration required by the specific order
the employee is subject to, multiplied by 12 and divided by
52. Such weekly sum shall not be subject to reduction
because of variations in the quality of the work performed."
The letter construed the monthly remuneration standard to parallel the
federal regulations that require a predetermined salary. It stated: "The definition and its
application will be more compatible with the federal standard of the weekly salary test."
It further noted that the "employee need not be paid for any week in which he or she
performs no work," and that the DLSE would look to federal and state case law, "which
defines the provisions of 29 C.F.R. §541.118," to construe the salary/remuneration
standards.
The DLSE reaffirmed these principles by publishing and disseminating the
1997 advice letter. Moreover, it reaffirmed and clarified this position in a subsequent
letter to Mr. Simmons dated September 3, 1997 that clarified the DLSE's intention to
follow a recent Ninth Circuit opinion (Boykin v. Boeing Co., 128 F.3d 1279 (9th Cir.
1997)), which had recognized the ability to pay supplemental sums to exempt employees
without transgressing the salary basis rules. The DLSE reproduced both advice letters in
its 1998 Enforcement Policies and Interpretations Manual, and continued to follow the
same enforcement position before and after AB 60's effective date.
It is clear that the "monthly salary" standards now found in Section 515 and
the wage orders were well established prior to AB 60. The Legislature and the
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Commission presumably were aware of this well publicized enforcement position when
AB 60 was enacted and the 2000 and 2001 wage orders were adopted. Yet, they did
nothing to indicate that they did not agree with the attempt by the DLSE to make the
California wage orders compatible with the federal standards by amending the
remuneration standards. Further, the DLSE did not adopt a change to that enforcement
position after AB 60 took effect in 2000.
2. AB 60 Calls For The Calculation Of A Weekly Salary
AB 60 restored the daily overtime provisions to California law that had
been deleted in five of the Commission's wage orders in 1998. Although AB 60 was
aimed primarily at California's overtime rules, it also addressed the "white collar
exemptions" for executive, administrative, and professional employees. It added Section
515(a) to the Labor Code to authorize the Commission to establish such overtime
exemptions, provided employees meet specified duties standards and earn "a monthly
salary equivalent to no less than two times the state minimum wage for full-time
employment." For this purpose, Section 515(c) specifies that "full-time employment" and
the amount of salary be measured on a weekly basis, not a monthly basis.
This is demonstrated by the term "full-time employment," which is defined
in Section 515(c) to mean "employment in which an employee is employed for 40 hours
per week." Based on this weekly standard, the minimum salary is determined by
multiplying 40 hours times a sum equivalent to twice the minimum wage. For example,
in 2002, the minimum salary is computed first by multiplying 40 weekly hours times
$13.50 (2 x the minimum wage of $6.75). This equates to a salary that equals $540 per
week.1 From the weekly sum calculated under the statutory formula in Section 515, an
annual or monthly sum can be computed, e.g., by multiplying the weekly sum by 52 ($540
x 52 = $28,080/year) and thereafter dividing the annual salary by 12 to determine the
monthly amount ($28,080 ÷ 12 = $2,340/month). Significantly, AB 60's formula calls for
the calculation of a weekly salary. It does not specify a formula for computing a monthly
salary. This is entirely consistent with the weekly system used under the FLSA and the
principles of state law described by the DLSE's Chief Counsel in 1997.
1 This is substantially greater than the minimum salary of $250 per week required
under the "short test" in federal law.
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3. AB 60 Continued To Use A Weekly Standard To Measure Overtime
Work and the Exemptions
AB 60 authorized the Commission to review the white collar exemptions,
but did not instruct the Commission to alter the salary standards. Labor Code Section
515(b)(2) entrusted the Commission with the authority to keep or change those standards.
It states: "Except as otherwise provided in this section and in subdivision (g) of Section
511, nothing in this section requires the Commission to alter any exemption from
provisions regulating hours of work that was contained in any valid wage order in effect
in 1997 [sic]." In fact, the section then states that "the commission may review, retain, or
eliminate any exemption." The Legislature thus contemplated that the Commission could
retain the exemptions that were established under the wage orders in effect in 1997, when
the DLSE's Chief Counsel issued the April 28, 1997 advice letter. This included the
salary features of those exemptions. The Commission's authority was reconfirmed on
September 19, 2000, when SB 88 reenacted the provisions of Section 515.
It is evident that the Legislature conferred authority upon the Commission
to preserve the status quo regarding the salary requirements. It is also clear that the
Commission chose to preserve the status quo in this area and did not intend to depart from
the federal standards. As explained above, the established enforcement policy under the
wage orders in effect in 1997 followed the federal salary basis standards, including the
rule that allowed salaries to be tested based on a weekly standard.
4. A Weekly Standard Is Compatible With The Provisions Of State
Law And The Long-Established System Of Wage-Hour
Administration
It should also be pointed out that the use of a weekly salary is compatible
with the system of wage and hour administration followed under California law. For
instance, overtime is paid for work in excess of 40 hours in a workweek, not on the basis
of a monthly standard. In fact, months vary in length while workweeks provide a fixed
and consistent measuring standard that has been applied for decades. In addition, the
provisions of AB 60 consistently use the week as the appropriate standard of
measurement. It determines full-time employment on the basis of a "week"
(Section 515(c)), establishes the minimum amount of salary based on a weekly standard
(40 weekly hours x $13.50 per hour) (Section 515(a)), provides that the overtime rate for
salaried employees who are mistakenly treated as exempt shall be l/40th of the
employee's "weekly salary" (Section 515(d)), and uses a weekly standard to determine
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when overtime is worked. Furthermore, many employees are paid weekly in accordance
with Labor Code Section 204.
Thus, the weekly standard is an integral part of California's wage and hour
scheme and plays a critical role in the administration of many of the standards established
under AB 60. Its central role in the administrative scheme is obvious. In contrast, few
employers use monthly pay periods or pay "monthly" salaries, and employers are not
required to pay overtime based on a monthly standard or to compute the regular rate of
pay on the basis of a monthly standard.2
In short, the use of a monthly period as the sole basis to measure the salary
standard would be incompatible with the normal methods of wage-hour and payroll
administration. It could lead to numerous administrative problems, including problems
with pay periods, overtime issues where an employee is found nonexempt, and the
determination of which "monthly" period to use, e.g., whether it must coincide with the
employee's anniversary month, the calendar month, the employer's fiscal month, or
whether it could be any 29 to 31-day period that the employer selects. In those instances
where vacation is charged for time missed or deductions from salary are permitted (e.g.,
for initial and terminal months of employment), practical problems and inequities could
arise in connection with adjustments to the monthly salary. For instance, it is unclear
whether the monthly salary would be reduced by 1/31, 1/30, 1/29 (depending upon the
number of calendar days in the month) or by some other fraction based on the number of
normal or scheduled work days in the applicable period. A monthly measuring period
that interferes with the use of vacation and other paid leave benefits would also impede
the flexibility demanded by the California Family Rights Act, Government Code
Sections 12945.2(d)-(e), Labor Code Section 230.8(b)(1), 3 and other state and federal
statutes.
2 Few employers use monthly pay periods due to Labor Code Section 204, which
ordinarily requires the use of a weekly, bi-weekly or semi-monthly pay period.
3 Both statutes explicitly permit employers to require the use of vacation and paid
leave benefits for time off. Government Code Section 12945.2(d) also states that an
"employer shall not be required to pay an employee for any leave taken" pursuant to
Section 12945.2(a).
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5. The 2000 And 2001 Wage Orders Preserve The Weekly Standard As
The Status Quo
The Commission incorporated the "monthly salary" language and standards
contained in Labor Code Section 515 within the wage orders that took effect on
October 1, 2000 and January 1, 2001. It is clear that in doing so the Commission did not
intend to alter the well-established position that the federal salary standards in 29 C.F.R.
§ 541.118 be followed. Indeed, no compelling need to alter those standards existed and
the Commission had the authority, under Section 515(b), to retain those standards.
On May 30, 2001, a letter was written by a DLSE representative that did not
reflect a full understanding of the Commission's intent in this area. After it was
discovered that the letter was issued and had possibly misinterpreted the law and the
Commission's intent, it was promptly withdrawn on June 22, 2001, so that the subject
could be further investigated. Many members of the public, including representatives of
organized labor, employees, employers and the legal community, testified before the
Commission about the confusion caused by the May 30th letter. The DLSE and others
asked the Commission to clarify its intent on this critical subject. The Commission heard
testimony on the issue on June 15, 2001, October 29, 2001, and December 7, 2001. It
also reviewed comments, evidence, and submissions from representatives of organized
labor, employers, employees, and the legal community.
The Commission made its original intentions regarding the salary standards
contained in the 2000 and 2001 wage orders unmistakably clear during this period. DLSE
interprets the Labor Code and the wage orders that implemented AB 60 to allow salaries
to be measured on a weekly basis.
6. The Salary Basis Standards
Based on the discussion set forth above, the DLSE has construed the wage
orders, the pertinent statutes, and the Commission's intent to preserve the status quo
regarding the applicability of the federal salary standards. Under those standards, a
prorated weekly salary test may be used to meet the California requirements of a monthly
salary. The following standards are consistent with the DLSE's enforcement position:
(a) An employee will be considered to be paid a "monthly salary"
if under his or her employment agreement the employee regularly receives each pay
period on a weekly, or less frequent basis, a predetermined amount constituting all or part
of his or her compensation, which amount is not subject to reduction because of
variations in the quality or quantity of the work performed. A salary that is no less than
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of twice the state minimum wage for employees who work 40 hours a week and that
meets the standards in 29 C.F.R. § 541.118 satisfies the state salary rule. Subject to the
exceptions provided below and in 29 C.F.R. § 541.118, the employee must receive his or
her full salary for any week in which he or she performs any work without regard to the
number of days or hours worked. This policy is subject to the general rule that an
employee need not be paid for any workweek in which he or she performs no work.
(b) The deductions from salaries allowed under 29 C.F.R.
§§ 541.118(a)-(c) of the federal regulations also are permitted under state law, as is the
payment of extra sums in addition to a salary. However, it must be noted that vacation is
treated differently under state law than federal law. Under California law accrued
vacation constitutes vested "wages." (Labor Code Section 227.3, Suastez v. Plastic
Dress-Up Co. (1982) 31 Cal.3d 774.
(c) The payment of a proportionate part of the employee's salary for
the time actually worked in initial and terminal weeks or months of employment is
consistent with the salary rules. In addition, adjustments in compensation and/or benefits
are permissible where other statutory requirements are met, such as the family and
medical leave rules that provide eligible employees the flexibility they need to take leaves
on a "reduced leave" or "intermittent leave" basis.
We hope this letter addresses the questions you have posed and clearly
articulates the DLSE's enforcement position. If we can offer any further assistance,
please feel free to contact us.
Sincerely,
Arthur S. Lujan,
Labor Commissioner
cc: Anne P. Stevason, Acting Chief Counsel
Tom Grogan, Deputy Chief
Assistant Chiefs
Bridget Bane, IWC Executive Officer
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