Navigating California’s two-tier minimum wage

bruce sarchet
Bruce Sarchet

California’s minimum wage went up at the beginning of the year and will continue to increase in the years to come in a series of six, stepped annual statewide increases.

However, for the first time in the state’s history, there will be two minimum wages: one for small employers with 25 or fewer workers, and another for large employers with 26 or more.

For employers with 26 or more employees, the minimum wage went up by 50 cents per hour on Jan. 1, from $10 to $10.50 per hour. For businesses with 25 or fewer employees, the minimum wage this year will remain $10 per hour. This two-tier system will be in effect until 2024.

An employee, for purposes of identifying which minimum wage rate applies, is any individual who is not a bona fide independent contractor performing compensable work for an employer. That includes part-time workers, minors and employees who are exempt from overtime, such as salaried executives, administrators or professionals.

Here is the potential challenge: suppose the employee headcount at a business fluctuates near the magic number of 25. Sometimes it is more than 25 employees, sometimes less.  Which minimum wage rate applies?

The California Division of Labor Standards Enforcement has published an FAQ sheet on this topic. You can find it on the DLSE’s website.

The agency indicates it will take a “per pay period” approach in situations involving a fluctuating workforce. When there is an ambiguity in law or facts, the courts generally look for a reasonable interpretation that is most favorable to workers.

The consequences for failure to pay the minimum wage are dire. The Legislature has created a series of penalties for technical noncompliance with the labor code, which are derivative, meaning they can be tacked on to each other. The availability of those penalties has led to the recent explosion of wage and hour law claims in California.

Penalties include those for failure to pay the minimum wage, failure to pay wages in a timely fashion, failure to provide an accurate pay stub and penalties under the California Private Attorney Generals Act. It is unclear whether an employee can recover Private Attorney Generals Act penalties in addition to the other penalties allowed.

However, count on attorneys bringing claims against employers to seek all penalties that may be available. It also is clear that an employee is entitled to recover the attorney’s fees incurred in bringing claims for wage and hour violations, plus interest on any unpaid amounts.

So, an employer might be better off just paying the higher rate of $10.50 per hour. For example, suppose an employer makes a mistake — it has 27 employees, but it pays only $10 per hour over a two-week pay period. The extra cost of paying $10.50 to those 27 workers would be $540 for the two weeks. Potential penalties for failure to pay the minimum wage could easily dwarf that amount.

Another scenario involves an employer that moves from 25 to 26 employees in the middle of a pay period. In that case, the California Labor Commissioner recommends paying the higher rate of $10.50 per hour for the entire pay period.

Another potential complication is that both the labor code and the general law of contracts require advance notice to employees of changes in wage rates. Such notice needs to be provided every time an employee’s wage rate changes.

In the end, a common-sense approach for a business with a workforce near the 25-employee level might be to pay the higher of the two minimum wage rates.

In 2018 the minimum wage rate will go up again. For employers with 25 or fewer employees, the rate will be $10.50 per hour; employers with 26 or more must increase the hourly rate to $11.

Bruce Sarchet is an attorney with the firm of Littler Mendelson and represents employers in labor and employment law matters.  You can contact him at [email protected].


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