The new federal overtime rules, the misclassification of employees, and recordkeeping are among the top five wage and hour risks employers in California face, according to California attorney Marc Jacuzzi of the law firm Simpson, Garrity, Innes & Jacuzzi, PC.

Overtime Risks

In a recent session at BLR’s California Employment Law Update (CELU) in Costa Mesa, California, Jacuzzi told attendees that employers in California must comply with the new federal overtime rules that take effect December 1, 2016, and at the same time, they must comply with California’s wage and hour laws, depending on which laws offer more protection or greater benefits to employees.

For example, the federal rules increase the salary basis for exempt employees to $47,476 per year while California requires double the state minimum wage which is currently $10 per hour or $41,600 per year.

So, employers in California must use the federal salary basis for their exempt employees beginning on December 1, 2016.  However, the minimum wage in California is scheduled to increase by $1 per hour each year until 2022. That means that starting January 1, 2019, the minimum wage in California will be $12 per hour, making the salary threshold in California $49,920 per year, which is higher than the current federal salary threshold.

But wait—there’s more! The federal rules allow for an automatic update of the salary level every 3 years, with the date of the first increase taking effect January 1, 2020.  So, employers in California must monitor both the federal and state increases and apply the higher of the salary thresholds.

Jacuzzi also pointed out other differences between federal and state law, including the fact that the “highly compensated employee” exemption permitted under the federal rules is not available to employers in California, and that the hourly rate of exempt computer professionals is higher under California law ($42.39) than under federal law ($27.63).

Misclassification Risks

The second wage and hour risk for California employers is misclassification of exempt and nonexempt employees. Under California law, employers must pay nonexempt workers time-and-one-half for hours worked in excess of 8 hours per day or 40 hours per week.

Under federal law, there is no daily overtime requirement, but employers must provide overtime pay for hours worked in excess of 40 hours per week. Jacuzzi noted several common misconceptions regarding exemptions, including: “If I put an employee on salary, he becomes exempt” and “Everyone else in my industry classifies this position as exempt, therefore I am entitled to classify it as exempt.”

These kinds of misconceptions can lead to big trouble for employers if it turns out that an employee classified as exempt is actually nonexempt and the employer is liable for overtime pay that should have been paid to the employee, but wasn’t.

It’s important for employers to do a self-audit now, Jacuzzi recommended, because it’s better for an employer to have done its audit before it’s required to do so under the direction of the federal or state labor department, the IRS, or other enforcement agencies. And doing an audit under the mantle of attorney-client privilege may give employers legal shelter from having to disclose the audit’s results to investigating agencies.

The new federal overtime rules, the misclassification of employees, and recordkeeping are among the top five wage and hour risks employers in California face

Recordkeeping Risks

The third area of legal risk for employers is wage and hour recordkeeping. Trouble spots for employers can include time records that should show a nonexempt employee’s meal and rest breaks; itemized wage statements that, under California labor law, must contain certain specific information; commissioned sales agreements that California law requires to be in writing and to provide certain information; and payment of business expenses—another area governed by strict statutory requirements in California.

Jacuzzi urged CELU attendees to review their organizations’ rounding procedures to make sure they are in compliance with state law and he noted that rounding of an employee’s time should not be used for the employee’s meal break because state law requires employees to have a 30-minute meal break.

PAGA Claim Risks

The fourth area of legal risk addressed by Jacuzzi is the increasing power of California’s Private Attorneys General Act (PAGA) claims.  PAGA allows an aggrieved employee to file a representative action for employer violations of certain labor code provisions covering items such as meal and rest breaks, minimum wage and overtime requirements, timely payment of wages at termination, and technical errors on itemized pay statements.

The penalties under these claims can add up quickly, Jacuzzi noted, with a $100 penalty per employee for an initial violation and a $200 penalty per employee per pay period.

Employee Liability Risks

The fifth legal risk is that, under recent changes to California law, certain employees may be personally liable for wage and hour violations.  The law states that any employer or “other person acting on behalf of an employer” (including an owner, director, officer, or managing agent of the employer) may be held liable.  The law has not been tested yet, so employers—and those employees—will need to wait to see how the courts interpret the law.