EXEMPT SALARIES MAY INCREASE BY OVER 10% FOR SMALL BUSINESSES

Effective January 01, 2023, California’s minimum wage will increase for all employees across California. Since 2017, there have been two different minimum wage rates based on the size of the California business. One rate has been required for businesses employing 26 or more employees, and another lower rate has been required for those employing 25 or less employees. In the upcoming year, all employers, regardless of size, will be required to pay a minimum of $15.50 an hour for each employee. This means a likely increase of up to $1.50 an hour for employees of smaller businesses.

In addition to your nonexempt hourly staff getting raises, this also means that some exempt employees may get a raise as well. Consistent with California law, exempt employees must meet both a “duties” test and a “salary” test. The minimum salary test for most exempt positions is two times minimum wage multiplied by 2,080 hours. Please note that these changes will also affect inside sales commissioned employees and employees who are required to provide and maintain their own hand tools as customarily required by their trade or craft.

Consequently, smaller employers (25 or less) that were paying their exempt employees the minimum annual salary requirement ($58,240) will need to increase salaries for these exempt employees to at least $64,480, more than a 10% increase. Employers with 26 or more employees must increase from the minimum annual salary of $62,400 up to $64,480. Please note, this annual salary requirement cannot include bonuses.

If your exempt employees do not make at least $64,480 as of January 01, 2023, the exempt employee will be considered misclassified, creating several areas of liability for unpaid wages and fines. There is also an important morale component here for employees who may have previously had higher salaries than their counterparts but who no longer will after this legally mandated raise goes into effect.

Finally, there are also several local ordinances within California that require a higher minimum wage than the state, regardless of company size, and you should familiarize yourself with the cities that have instituted such ordinances if you have a transient workforce. Failure to make the necessary adjustments could likely result in fines from the labor commissioner or a court of law.