Think California’s just-enacted minimum-wage increase only applies to low-paid hourly workers? Think again.

Under a little-noticed provision in state law, every time the minimum wage is increased, the exemption threshold for salaried workers also rises – but at double the annual minimum wage.

Right now, with the minimum wage at $10 an hour, supervisory, managerial, and professional employees must earn at least $41,200 a year to be legally exempt from the state’s hourly pay laws, including overtime pay and meal/rest breaks.

But when the minimum wage hits $15 a year for all employers in the state by 2023, that threshold will have jumped 50 percent as well – all the way to $62,400 a year. (Employers in Los Angeles and other cities where the minimum wage will hit $15 an hour as early as 2020 will have even less time to adapt.)

Any worker earning below $62,400 amount must be paid hourly, get paid time-and-a-half for overtime, and will be required to take regular meal and rest breaks.

Bad options

This is forcing a wrenching choice on many employers. Take Vincent Passanisi, president of Marisa Foods, an Italian deli food maker and restaurant chain in Long Beach. Out of 70 employees at the food manufacturing plant, three are salaried supervisors with annual salaries between $42,000 and $50,000.

Passanisi said that with the minimum-wage increase directly affecting pay for many of his hourly workers, he will not have the budget to increase those supervisors’ salaries to more than $62,000 a year over the next five years.

“I have no choice but to convert these workers to hourly pay,” he said.

And if history is any guide, those employees won’t be happy about it. One big reason: To keep the overall pay the same, Passanisi will be factoring in overtime pay. Because of seasonal variations in production, there are stretches of weeks where plant workers put in a lot of overtime. So he said the base hourly pay rate for those three employees will have to be lowered to keep within payroll budget.

“When I’ve done this for past minimum-wage increases, there has been disappointment and even anger from employees,” Passanisi said.

There are other consequences as well. For example, salaried employees have more flexibility to take time off for a family issue and make up the missed time without incurring overtime; Passanisi said that switching them to hourly pay will mean some requests for time off might have to be denied.

Broad impact

Passanisi’s Marisa Foods is hardly alone. Employers in a wide range of industries – from restaurants and retail stores to the hospitality sector – classify at least some of their workers as supervisory personnel, exempt from hourly pay, overtime and other requirements. All of those exempt workers receiving less than $62,400 would either have to have their pay boosted to that level or would default to hourly employee status.

Professional businesses, such as law and engineering firms, also have entry-level salaried employees, though at many law firms, paralegals are paid hourly.

The number of exempt workers is not tracked statewide. But a pending rule change at the federal level that would hike the exemption threshold to $50,440 a year from the current $23,660 has been projected to impact more than 10 million workers, which would imply at least several hundred thousand such workers in California.

Immediate hit?

Actually, it is that pending federal rule change that’s causing local employers more immediate concern, according to Matthew Bartosiak, senior consultant with the Employers Group, a human resources management organization in El Segundo. The Obama administration proposed the change last year, touting it as a way to make millions of workers eligible for overtime pay.

That rule change could take effect later this year, though Congress might act to override it and, should it survive that, legal challenges are widely expected.

“If this federal increase in the threshold goes through, that will have a huge impact because the increase to $50,000 would be immediate,” Bartosiak said.

In California, the impact would likely be less, many companies have already switched exempt salaried employees to nonexempt hourly employees. One reason: lawsuits.

“Many of my members have been forced to make the switch to nonexempt hourly status because they have been sued over this issue and lost in the courts,” said Bill Dombrowski, chief executive of the California Retailers Association in Sacramento, which represents major retail operators in the state.

Morale blow

As for the jump in the exemption threshold in California as the minimum wage increases, Bartosiak said that while many employers might choose to convert salaried employees to hourly workers instead of boosting annual salaries to more than $62,000, that approach carries many downsides, for both workers and employers.

If other employers choose the approach that Passanisi has taken, to reduce hourly pay for those converted to hourly status, that will reduce vacation pay and employer contributions to pension plans, which are tied to pay rates. Required meal and rest periods could also impact work flow, especially during peak times.

But most of all, Bartosiak said, employee morale would likely suffer.

“For many workers, there’s increased status with the exempt salary designation,” he said. “Make them nonexempt and that status disappears. That’s bound to affect their morale.”

Passanisi said that has indeed happened during past switches, with some of the impacted workers reacting angrily.

“I simply tell them that under state law, I don’t have a choice – it has to be this way,” he said.

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