California Approves Exempt Salary Reduction

The California Labor Agency recently issued an opinion allowing employers to reduce an exempt employee’s salary and hours worked, at the same time, without endangering the worker’s status as a salaried exempt employee.

In the example used, the state labor agency permitted an employer faced with economic difficulties to reduce the work schedule of exempt employees from five days to four days. The state DLSE or Department of Labor Standards Enforcement ruled in a recent opinion letter that simultaneously reducing the employee’s salary by 20%  “did not violate the ‘salary basis’ for the workers’ overtime exemption under the state Labor code and wage orders” as long as the employer’s action is a temporary measure.

This is a radical change, since the DLSE took the opposite position in 2002. In an opinion letter issued in that year, the California agency ruled that the employer could reduce an employee’s salary. However, if the employee’s work hours were also reduced, that change the employee from exempt to non-exempt status.

This is a primary concern for California employers, since non-exempt employees are entitled to overtime under state law. California has the strictest overtime regulations of any state, requiring overtime after 8 hours per day, double-time after 12 hours per day, and special premiums on the 7^th consecutive day of work.

The new California policy on exempt employees includes several crucial conditions: 

• When economic conditions permit, the exempt employee must be restored to full salary
•  The salary reduction is permitted only when the employer is experiencing “significant economic difficulties”
•  Affected employees whose new salary is not at least twice the state minimum wage for full-time employment, will become eligible for overtime
•  The employer cannot alter the employees salary so often that the salary basis becomes a “sham.”  

This newest California exempt employee regulation puts the state law on a par with federal regulations under FLSA, the Fair Labor Standards Act. However, there is one important exception: under FLSA, the salary reduction must be in effect for at least 3 months. Under California regulations, the original salary must be restored as soon as economic conditions permit.