Inflation Disrupts California’s Minimum Wage Rate Schedule, Prompts Pay Increases for Non-Exempt and Exempt Employees in 2023, and Impacts Other California Laws

On July 27, 2022, the Director of California’s Department of Finance sent a letter to Governor Gavin Newsom and other state officials, noting that the Department had determined poor economic conditions necessitated expedited increases to the minimum wage. Due to changes in the consumer price index (CPI) from July 1, 2021 through June 30, 2022, the state’s minimum wage law requires the state to bring forward by one calendar year – from 2024 to 2023 – the date when it must annually adjust the minimum wage rate. Rather than, as expected, a $15-per-hour minimum wage being applied to employers of all sizes in 2023, the minimum wage will instead increase to $15.50 per hour for all employers, on January 1, 2023. The minimum wage law requires the rate adjustment to be the lower of 3.5% or the rate of inflation – 7.9% during the relevant period – and 3.5% of $15 is 50 cents.

The change to the minimum wage rate will affect more than just employees currently paid at or near the state minimum wage. It will also affect whether employees will (continue to) qualify to be exempt from state minimum wage and/or overtime requirements, the dollar amount of a sub-minimum wage an employer might be able to pay certain employees, whether various state laws apply to or exclude employees who are paid a specific percentage more than the state minimum wage, etc.1

Exempt Employees: To qualify for the executive, administrative, and/or professional exemption from state minimum wage and overtime requirements, an employee—in addition to meeting other requirements—must earn a monthly salary of no less than twice the state minimum wage for full-time employment (40 hours per week). To qualify for the commission sales overtime exemption, commissions must represent more than half of the employee’s compensation and an employee must earn more than 1.5 times the minimum wage.

Learners: Employers may be able to pay employees with no previous similar or related experience in an occupation 85% of the minimum wage for their first 160 hours of employment.

Piece Rate Worker Rest & Recovery Periods and Non-Productive Time: Employees compensated on a piece-rate basis must be paid for rest and recovery periods and other nonproductive time separate from their piece-rate compensation. Rest period and recovery period time must be paid at the employee’s average hourly rate for the workweek or the applicable (federal, state, or local) minimum wage, whichever is greater. For other non-productive time, such employees must receive an hourly rate that is no less than the applicable (federal, state, or local) minimum wage.

Tools & Equipment: Generally, if tools or equipment are required or necessary to perform a job, an employer must provide and maintain them. However, if the wage of an employee is at least twice the minimum wage, an employer might be able to require the employee to provide and maintain hand tools and equipment the trade or craft customarily requires.

Unionized Employees: Some state laws contain an exception for unionized employees if, in addition to other requirements, their collective bargaining agreements provide premium wage rates for overtime hours and a regular hourly rate of pay for CBA-covered employees of not less than 30% more than the state minimum wage.

Next Steps

Before January 1, 2023, employers should review current pay rates for both non-exempt and exempt employees, to see how those amounts compare to what California law will require next year and what impact, if any, this unscheduled pay increase might have on their labor budget. Companies subject to one or more of the dozens of local minimum wage ordinances that apply throughout California should compare $15.50 against what an applicable local law will (if known) or might (if annually adjusted) require on January 1, 2023. Although historically, local rates often exceed the state minimum wage, smaller employers, or those with certain types of employees who might be subject to a local sub-minimum wage rate, might see the state rate overtake its local counterpart in all or part of 2023. Employers should track local developments, as a locality might adopt or amend a minimum wage ordinance in response to the statewide increase (or enact a law regardless of state activity, e.g., there is an emerging trend of local minimum wage ordinances specific to healthcare workers).

See Footnotes

1 Other examples of affected minimum wage rate-related standards include, but are not limited to: commissions for employees licensed under the Barbering and Cosmetology Act; the per classroom hour pay option for higher education instructors; the sheepherder monthly minimum wage pay option; the trip formula pay option for crew members on a licensed commercial passenger fishing boat; camp employee sub-minimum wage; meal period timing for certain commercial drivers making agriculture-related deliveries to remote areas; minimum dollar value for reporting time pay and split-shift premiums.

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.