California Labor Code Amendment Facilitates Compliance with regard to Computer Professionals

A recent amendment to the California Labor Code, signed into law by Governor Schwarzenegger on September 30, 2008, and effective immediately, makes it easier for employers to ensure that persons employed in computer-related jobs continue to meet the requirements for exemption from state overtime pay requirements.  Previously, computer professionals who met the other requirements of the exemption were exempt only if they also were paid at least $36 per hour.  The amendment adds a compensation standard for salaried employees, by providing that computer professionals who are paid on a salaried basis must earn an annual salary of at least $75,000 for full-time employment, paid at least once a month in a monthly amount of at least $6,250. (Cal. Lab. Code § 515.5(a)(4) (2008)).  This amendment will make it easier for employers to determine whether employees in computer-related jobs are covered by the exemption, and to ensure ongoing compliance with the exemption’s compensation requirements.

California wage and hour laws require generally that non-exempt employees be paid one and one-half times their regular rate of pay for hours worked between eight and twelve in a day, in excess of forty in a week, and for the first eight hours worked on the seventh consecutive day of work in a workweek.  Non-exempt employees must also be paid double their regular rate of pay for hours worked over twelve in a day and for all hours worked in excess of eight on the seventh consecutive day of work in a workweek.

Section 515.5 of the California Labor Code establishes an exemption from these overtime requirements for certain professional employees.  Qualifying employees must be “primarily engaged in work that is intellectual or creative and that requires the exercise of discretion and independent judgment.” “Primarily engaged” means that the employee spends more than fifty percent of his or her time performing exempt work. (Cal. Lab. Code § 515.5(a)(1) (2008)).

Computer professionals qualify for the exemption only if they perform jobs involving one or more of the following types of work:

• The application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software, or system functional specifications;
• The design, development, documentation, analysis, creation, testing, or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications, or;
• The documentation, testing, creation, or modification of computer programs related to the design of software or hardware for computer operating systems. (Cal. Lab. Code §§ 515.5(a)(2)(A); 515.5(a)(2)(B); 515.5(a)(2)(C) (2008)).

On the other hand, certain kinds of computer-related positions are ineligible for the exemption, such as trainee and entry-level positions, and positions that consist of the operation, manufacture, repair, or maintenance of computers or related equipment.  Moreover, employees who are engaged in otherwise-qualifying computer-related work are ineligible for the exemption if their work is for the purpose of creating effects for the motion picture, television, or theatrical industry. (Cal. Lab. Code §§ 515.5(b)(1); 515.5(b)(3); 515.5(b)(5) (2008)).  Jobs that have been found to qualify for the exemption include certain programmers and systems analysts. 

Finally, to qualify for the computer-employee exemption, the employee must also meet certain minimum compensation requirements.  The employee must be paid no less than a specified hourly rate, which was $36 per hour when the provision was enacted, but which is subject to annual adjustment based on inflation.  The recent amendment adds a compensation requirement for salaried employees: to qualify for the exemption, the employee must earn an annual salary of at least $75,000 for full-time employment, which is paid at least once a month and in a monthly amount of not less than $6,250. (Cal. Lab. Code § 515.5(a)(4) (2008)).

Prior to the amendment, the statute only specified a compensation standard based on an hourly wage.  Consequently, a salaried employee was eligible for the exemption only if the minimum hourly rate was met for all hours the employee worked.  This not only made it difficult for employers to determine whether salaried employees qualified for the computer professional exemption, but also made it easy for employees to lose the exemption.  For the 2007 calendar year, for example, an hourly wage rate of $49.77 was required to qualify for the exemption.  A computer employee paid a salary of $115,000 per year in 2007 was paid approximately $55 per hour for a 40-hour work week, which was in excess of the required $49.77 hourly wage.  However, if that employee worked more than 40 hours in a week, the exemption could be at risk. If the employee worked 50 hours per week, for example, he or she would earn the equivalent of $44.23 per hour and would not qualify for the exemption.  In order to protect themselves from costly overtime claims by salaried employees, employers were required to track all hours worked by employees they believed qualified for the exemption, and to set the salaries of those employees at a level that would ensure that the exemption would not be lost.  By establishing a minimum compensation standard for salaried employees, the amendment makes it easier for employers to ensure compliance.

Each October, the Division of Labor Statistics and Research is required to adjust the salary requirements for the exemption in accordance with the cost of living index.  Any change in the salary requirements is effective as of January 1, of the following year.  The amended statute provides that yearly adjustments will now be made to both hourly and salaried employee wage requirements.

If you have any questions regarding this important new amendment, or California wage and hour compliance generally, please contact any of the attorneys in our Los Angeles or San Francisco offices.