Why Learning How to Count to 26 Just Became Important: Recent Changes to California and Local Minimum Wage Laws

Recently California’s Division of Labor Standards Enforcement (“DLSE”) issued an FAQ concerning 2016 legislative changes that impact the state minimum wage in 2017 and future years. The most notable change was the creation of a two-tier system in which a $10.50 minimum wage rate applies to employers with 26 or more employees and a $10.00 minimum wage rate applies to employers with 25 or fewer employees. The FAQ do not provide concrete guidance as to how employer size is calculated, but do provide a glimpse into how DLSE might interpret the law. The lack of clarity in the FAQ will particularly frustrate some Southern California employers that must also comply with local minimum wage laws which, like their state counterpart, use a 26/25 employee cut-off, but a different test to determine employer size.

The DLSE guidance regarding the state test can be summed up as follows:

  • The statute does not specify what timeframe to use when  calculating the number of employees, but a court or DLSE will likely focus on the pay period(s) in which a violation is alleged.
  • All employees will be counted, including exempt employees, regardless of hours worked or their location.
  • Employers must make a reasonable, good faith determination, which should take into consideration that the law is generally interpreted to favor workers.
  • In joint employment scenarios, all individuals under an employer’s control are counted.
  • If workers are provided by a staffing agency, an employer should count those individuals as its employees.

There are five local jurisdictions in California that use a two-tier minimum wage system based on whether an employer has 26 or more, or 25 or fewer, employees: City of Los Angeles; County of Los Angeles (unincorporated areas); Malibu; Pasadena; and Santa Monica. Below we highlight differences in the local tests to determine employer size:

  • Timeframe: The state test uses a pay period by pay period analysis. The local jurisdictions use the employer’s size in the prior calendar year.
  • Employee Types Counted: The state test counts exempt employees. In an FAQ, Santa Monica states its test is based on covered employees (i.e., those who work at least two hours in a particular week in the city and are entitled to the state minimum wage). Although the other relevant localities use the same standard as Santa Monica to define who is a covered employee, none but possibly the City of Los Angeles indicates whether employee head count is based on covered or all employees.
  • Location of Employees: The state test counts employees regardless of their location, which implies employees in other states or countries are counted. Pasadena counts employees in the United States. The City of Los Angeles counts only individuals working in L.A. at least two hours per week.
  • Minimum Wage Rate Duration: The state test can result in a different minimum wage rate in different pay periods. However, in the City of Los Angeles, for new employers, size is based on workforce numbers during the first pay period. Also, if a business is deemed a small employer, the lower minimum wage rate can be paid until July 2021.

Finally, it is important to note California and these localities use different dates for their minimum wage increases. The state’s minimum wage increased to $10.50 per hour on January 1, 2017, but only for employers with 26 or more employees; the minimum wage rate remains $10.00 per hour for employers with 25 or fewer employees. However, a $10.50 per hour minimum wage rate for employers with 26 or more employees in the relevant local jurisdictions has been in effect since July 1, 2016. The local rate for employers with 26 or more employees will increase to $12 per hour on July 1, 2017 (the state rate will not reach this level until, at the earliest, January 1, 2019). Currently, in all of the above-referenced local jurisdictions there is no specific minimum wage rate for employers with 25 or fewer employees (so the $10.00 per hour state rate applies), but this will change on July 1, 2017, when a $10.50 per hour local rate takes effect.

Employers with a total of 25 employees overall (exempt and non-exempt) should not have significant issues determining that they fall into the small employer minimum wage category.  However, as outlined above, employers with 26 or more employees overall will have to analyze a number of different factors to determine whether they qualify as a small or large employer under their local jurisdiction rules, or under the state test if they are not in one of the five local jurisdictions that uses a two-tier minimum wage system.