Existing law, with certain exceptions, establishes 8 hours as a days work and a 40-hour workweek, and requires payment of prescribed overtime compensation for additional hours worked. Existing law establishes the Division of Labor Standards Enforcement in the Department of Industrial Relations for the enforcement of labor laws, including overtime payment. Under existing law, a person who violates the provisions regulating work hours is guilty of a misdemeanor.

This bill would establish a rebuttable presumption that an employee is exempt from overtime pay an employee with a if the employee earns total gross annual compensation of at least $100,000 if that employee also and regularly performs any of the exempt duties or responsibilities of an executive, administrative, or professional employee as set forth in the Industrial Welfare Commission Wage Orders. This bill, to rebut the presumption, would require evidence that the employee did not earn total gross annual compensation of at least $100,000, that the employee did not earn at least $1,000 per week, as specified, or that the employee did not regularly perform at least one exempt duty of an executive, administrative, or professional employee. This bill would only apply to an employee whose primary duty includes office or nonmanual work, as described. By expanding the scope of an existing crime, this bill would impose a state-mandated local program.

Existing law, with certain exceptions, establishes 8 hours as a days work and a 40-hour workweek, and requires payment of prescribed overtime compensation for additional hours worked. Existing law establishes the Division of Labor Standards Enforcement in the Department of Industrial Relations for the enforcement of labor laws, including overtime payment. Under existing law, a person who violates the provisions regulating work hours is guilty of a misdemeanor.

This bill would exempt from overtime pay an employee with a total gross annual compensation of at least $100,000 if that employee also regularly performs any of the exempt duties or responsibilities of an executive, administrative, or professional employee as set forth in the Industrial Welfare Commission Wage Orders. This bill would only apply to an employee whose primary duty includes office or nonmanual work, as described. By expanding the scope of an existing crime, this bill would impose a state-mandated local program.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

Date of Hearing: April 22, 2015

ASSEMBLY COMMITTEE ON LABOR AND EMPLOYMENT

Roger Hernández, Chair

ABPCA Bill Id:AB 1470

Author:Alejo – As Amended Ver:April 6, 2015

SUBJECT: Working hours: overtime

SUMMARY: Establishes an overtime exemption presumption for specified "highly compensated" employees that meet specified conditions. Specifically, this bill:

1. Provides that there is a rebuttable presumption that an employee is exempt from the payment of overtime if the employee earns total gross annual compensation of at least one hundred thousand dollars ($100,000) and also "customarily and regularly" performs any one or more of the exempt duties or responsibilities of an executive, administrative, or professional employee as set forth in the Industrial Welfare Commission Wage Orders.

2. Specifies that "total gross annual compensation” shall include at least one thousand dollars ($1,000) per week paid on a salary or fee basis.

3. Provides that if an employee’s total gross annual compensation does not meet the minimum amount established by the last pay period of the 52-week period, the employer may, during the last pay period or within one month after the end of the 52-week period, make one final payment sufficient to achieve the required total.

4. Provides that an employee who does not work a full year for the employer, either because the employee is newly hired after the beginning of the year or ends the employment before the end of the year, is exempt from overtime if the employee receives a pro rata portion of the minimum amount established above, based upon the number of weeks that the employee will be or has been employed. An employer may make one final payment as described above within one month after the end of employment, or this exemption shall not apply.

5. Provides that if an employee has a total gross annual compensation of at least one hundred thousand dollars ($100,000), there will be a rebuttable presumption that the employee is exempt from overtime.

6. Provides that the presumption created by this bill shall be rebutted only by evidence of one or more of the following:

   1. The employee did not earn total gross annual compensation of at least $100,000.

   2. The employee did not earn at least $1,000 per week paid on a salary or fee basis.

   3. The employee did not customarily and regularly perform at least one exempt duty or responsibility of an executive, administrative, or professional employee as set forth in the Industrial Welfare Commission Wage Orders.

7. Specifies that this bill applies only to employees whose primary duty includes performing office or nonmanual work.

8. Specifies that this bill does not apply to nonmanagement production-line workers and nonmanagement employees in maintenance, construction, and similar occupations, such as carpenters, electricians, mechanics, plumbers, iron workers, craftsmen, operating engineers, longshoremen, construction workers, laborers, and other employees who perform work involving repetitive operations with their hands, physical skill, and energy, regardless of the amount of their compensation.

9. Specifies that this bill does not apply to an employee covered under a valid collective bargaining agreement that expressly provides for the wages, hours of work, and working conditions of employees, including premium wage rates for all overtime hours worked.

EXISTING LAW:

1. Defines a day's work as eight hours of labor.
   
   

2. Requires that any work in excess of eight hours day, in excess of 40 hours a week, and the first eight hours on the seventh day of work are to be compensated at no less than one and one-half times the regular rate of pay, and provides corresponding exemptions for certain classifications of employees.
   
   

3. Requires that any work in excess of 12 hours a day and in excess of eight hours on the seventh day of work are to be compensated at no less than twice the regular rate of pay, and provides corresponding exemptions for certain classifications of employees.
   
   

FISCAL EFFECT: Unknown

COMMENTS: The federal Fair Labor Standards Act (FLSA) requires the payment of overtime for hours worked over 40 in a given workweek. California law differs from the FLSA in several important aspects, most notably that California has a daily overtime standard that also requires the payment of overtime for hour worked over eight (8) in a given work day.

Existing "White Collar" Exemptions Under State and Federal Law

Both state and federal law contain what are generally referred-to as "white collar" exemptions for executive, administrative and professional employees that meet certain criteria. These exemptions generally have two components – a "salary" test and a "duties" test. In order to be exempt, an employee must earn at least a specified salary and perform duties that meet the requirements of the exemption.

Under California law, in order to meet the "salary" test, an exempt employee must earn a monthly salary equal to not less than two times the state minimum wage.

Under California law, in order the meet the "duties" test, an employee must be "primarily engaged in" exempt duties. California law defines this to mean that more than one-half (50 percent) of the employees work time is spent performing exempt work. In other words, it is a quantitative analysis. This is significantly different from the federal test under the FLSA which simply requires that the “primary duty” of the employee fall within the exempt duties (a more qualitative analysis).

The "Highly Compensated" Exemption Under the FLSA

In addition to the "white collar" exemptions described above, the federal FLSA also contains an exemption for specified "highly compensated" employees. No current "highly compensated" exemption exists under California law.

The language in this bill closely tracks the FLSA exemption, which is contained in the FLSA regulations. (29 CFR § 541.601). Like this bill, the federal exemption exempts employees with a total annual compensation of at least $100,000 who "customarily and regularly" perform any one or more of the exempt duties of the "white collar" exemptions. The federal regulations provide that the term "customarily and regularly" means a frequency that must be greater than occasional but which may be less than constant. (29 CFR § 541.701). Tasks or work performed "customarily and regularly" includes work normally and recurrently performed every workweek; it does not include isolated or one time-tasks. Id.

The main differences between this bill and the federal exemption are:

• The federal exemption applied to an employee with a "total annual compensation" of at least $100,000. (29 CFR § 541.601(a). This bill provides that there is a rebuttable presumption that an employee is exempt from the payment of overtime if the employee earns "total gross annual compensation" of at least one hundred thousand dollars $100,000 and meets other requirements.

• Under federal law, the total annual compensation must include at least $455 per week paid on a salary or fee basis. (29 CFR § 541.601(b)(2). Under this bill, the weekly compensation shall be at least $1,000 per week.

• This bill states that if an employee has a total gross annual compensation of at least $100,000, there is a rebuttable presumption that the employee is exempt from overtime. Federal law does not contain such a presumption, but the federal regulations do state, "A high level of compensation is a strong indicator of an employee's exempt status, this eliminating the need for a detailed analysis of the employee's job duties." (29 CFR § 541.601(c)).

• This bill purports to establish a collective bargaining exemption stating that the bill does not apply to an employee covered under a valid collective bargaining agreement that expressly provides for the wages, hours of work, and working conditions of employees, including premium wage rates for all overtime hours worked. There is no such collective bargaining exemption under federal law.

ARGUMENTS IN SUPPORT

According to the author, this bill will make state law similar to federal law by creating a presumption in California that a highly compensated employee, performing a non-manual labor job, and performing a specified exempt duty is properly classified as a salaried employee and exempt from wage and hour requirements. Currently, employees who are paid an annual salary of at least $100,000 and regularly perform at least one of a select number of exempt duties are exempt under the federal FLSA. California does not currently have the same exemption. According to the author, this creates a unique opportunity for costly class action litigation in California against employers who are creating high paying jobs regarding the exempt status of such employees.

According to supporters, including the California Chamber of Commerce:

"Federal law has recognized for over ten years that employees performing non-manual labor and annually receiving at least $100,000 are likely properly classified as exempt. Although such employees must also perform at least one exempt duty, such as supervising other employees or exercising independent judgment and discretion, courts have a 'relaxed' analysis of the duties if the employee is highly compensated. See Anani v. CVS RX Services, Inc., 730 F.3d 146 (2d Cir. 2013). 'A high level of compensation is a strong indicator of an employee's exempt status, thus eliminating the need for a detailed analysis of the employee's job duties.' See 29 CFR 541.601 (c). [This bill] seeks to create a similar exemption at the state level.

There have been multiple examples in the past few years of employers in California who are creating highly compensated jobs, yet being subject to class action litigation based upon the allegation that such employees are misclassified as salaried, exempt workers. Although such claims cannot proceed under federal law, courts have no choice but to allow these costly actions to proceed under state claims, given California’s lack of conformity on this issue. [This bill] would address this loophole and help limit frivolous class action litigation against employers in California who are creating highly paid jobs. While [this bill] is similar to federal law, it actually differs in that it would only create a presumption that the employee is exempt, thereby allowing an employee who feels he/she has been truly misclassified to still challenge their status as a salaried employee.

Notably, [this bill] would not apply to the following employees: (1) employees performing manual labor, no matter how much they are paid; (2) employees covered under a collective bargaining agreement; or (3) the following specific occupations - nonmanagement production-line workers and nonmanagement employees in maintenance, construction, and similar occupations, such as carpenters, electricians, mechanics, plumbers, iron workers, craftsmen, operating engineers, longshoremen, construction workers, laborers, and other employees who perform work involving repetitive operations with their hands, physical skill, and energy, regardless of the amount of their compensation. [This bill] is limited to those employees who are actually performing exempt, non-manual labor duties and being highly compensated."

ARGUMENTS IN OPPOSITION

Opponents, including the California Labor Federation, AFL-CIO, argue that at a time of record income inequality, it is unfathomable why a proposal would move forward that would lower worker pay and reward employer misconduct. They contend that while this bill purports to focus on highly compensated workers, it fundamentally undermines the way overtime exemptions are determined and sets dangerous precedents for other workers. It would also open the door to employer game-playing to avoid overtime even retroactively. They state that, while this bill would not apply to union members, most of whom make considerably less than the income threshold in the bill, the labor movement has never supported policies that harm non-union workers or give their employers a competitive advantage.

Specifically, they state the following:

"The right to overtime pay is a core worker protection that serves numerous policy goals. First and foremost, it allows a worker to go home to his or her family at the end of the day or to receive premium pay for working additional hours. It provides an economic incentive for employers to staff appropriately, rather than just increase the workload for existing employees. In fact, when overtime was initially introduced into federal law more than 50 years ago, it was done so in part to stimulate job creation. In addition, overtime is important is protecting worker health and safety and reducing accidents due to fatigue.

[This bill] would fundamentally undermine the existing criteria for overtime exemptions. Under existing law, administrative, executive, and professional employees are only exempt from overtime if they are “primarily engaged in” the performance of duties that are deemed professional, technical, or administrative. That is further defined as meaning that more than one-half of the employee’s time is spent on qualifying duties. This bill would change that for workers meeting the salary threshold to exempt anyone who “customarily and regularly performs any one or more of the exempt duties or responsibilities.” That presumably means that if a worker regularly performs one duty a day that qualifies as professional, technical, or administrative, he or she will be exempt…

…[This bill] would open the door to employer mischief. This bill would not only provide an exemption if the worker hits the salary threshold, but it would also allow an employer to pay a worker a lower salary all year long and then in one lump sum bring them up to the required salary level. Presumably this allows an employer to wait an entire year plus an additional month to determine whether to pay the worker for overtime or whether to pay them the additional salary. This would likely mean that overtime hours were not even tracked and would be nearly impossible to remedy where there were abuses. Even worse, an employer could pay a lower salary all year until faced with a wage claim, and make up the difference to avoid all retroactive liability. This could create a scenario where the default is that employers do not pay overtime and if they face claims for unpaid overtime they simply make up the difference. In addition, the salary threshold can be met in any calendar year, fiscal year, or anniversary of hire year, allowing the employer to cherry pick the timeframe to maximize this exemption….

...[This bill] would make it even harder for workers who are wrongfully classified to get justice. This bill would create a presumption that if a worker meets the salary test he or she is exempt. That means that even if a worker does not fit into the criteria of the bill, he or she would have the burden of proof to overcome that presumption and demonstrate overtime eligibility."

Similarly, the California Employment Lawyers Association states, "Any visceral appeal of a bill like this stems from a misguided focus on a notion that 'people making that kind of money shouldn’t get overtime'. But important laws and public policies should not be gutted because of visceral reactions that ignore those laws’ important purpose and effect….By eliminating the [overtime premium] imposed under the eight-hour workday, employers are encouraged to require longer hours for their existing workers rather than hire additional workers. This results in depressed wages, fewer jobs, and a higher demand on individual workers…In what possible way is a bill that gives employers incentives to reduce jobs good public or economic policy? Isn’t the middle class doing poorly enough?"

The California Teamsters Public Affairs Council states, "[This bill] is nothing more than a mean spirited attempt to lower wages for workers. It is a transfer of wealth from workers to employers."

REGISTERED SUPPORT / OPPOSITION:

Support

Air Conditioning Trade Association

Brawley Chamber of Commerce

California Apartment Association

California Association of Winegrape Growers

California Bankers Association

California Broadcasters Association

California Chamber of Commerce

California Employment Law Council

California Manufacturers and Technology Association

California Mortgage Bankers Association

California Retailers Association

Civil Justice Association of California

Fullerton Chamber of Commerce 

Goleta Valley Chamber of Commerce  

Greater Bakersfield Chamber of Commerce

Morgan Hill Chamber of Commerce

National Federation of Independent Business 

Oxnard Chamber of Commerce   

Palm Desert Area Chamber of Commerce  

Plumbing-Heating-Cooling Contractors Association of California

San Jose Silicon Valley Chamber of Commerce         

Santa Clara Chamber of Commerce & Convention-Visitors Bureau

Santa Maria Valley Chamber of Commerce & Visitors Convention Bureau

Simi Valley Chamber of Commerce

South Bay Associations of Chambers of Commerce

Southwest California Legislative Council

TechAmerica

TechNet

The Chamber of Commerce Mountain View

Turlock Chamber of Commerce

Western Electrical Contractors Association

Western Growers Association

Wine Institute

Opposition

CA Conference Board of the Amalgamated Transit Union

CA Conference of Machinists

California Employment Lawyers Association

California Labor Federation, AFL-CIO

California Nurses Association

California Professional Firefighters

California School Employees Association

California Teamsters Public Affairs Council

Consumer Attorneys of California

Engineers & Scientists of CA, IFPTE Local 20

International Longshore & Warehouse Union

Professional & Technical Engineers, IFPTE Local 21

State Building and Construction Trades Council

UNITE-HERE

Utility Workers Union of America

Analysis Prepared by: Ben Ebbink / L. & E. / (916) 319-2091