On September 30, 2008, California Governor Arnold Schwarzenegger signed Assembly Bill 10 (AB 10) into law. AB 10 amended the existing overtime exemption requirements for computer professionals in Section 515.5 of the California Labor Code with respect to two areas: (1) employee duties; and (2) employee compensation. This update summarizes those amendments.
Prior to the enactment of AB 10, computer software professionals working in California were exempt from overtime laws only if the following duties requirements were met:
- The employee is primarily engaged in work that is intellectual or creative and that requires the exercise of discretion and independent judgment.
- The employee is primarily engaged in duties that consist of one or more of the following:
- 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.
- The documentation, testing, creation, or modification of computer programs related to the design of software or hardware for computer operating systems.
- The employee is highly skilled and is proficient in the theoretical and practical application of highly specialized information to computer systems analysis, programming, and software engineering. A job title shall not be determinative of the applicability of this exemption.
Cal. Labor Code § 515.5(1)-(3) (emphasis added).
These requirements remain the same after the enactment of AB 10, except for one change: the conjunctive requirement that an employee be engaged in “computer systems analysis, programming, and software engineering” has been relaxed to a disjunctive requirement that an employee be engaged in “computer systems analysis, programming, or software engineering.” As a result, more computer professionals can be exempt from California’s overtime laws.
Prior to the enactment of AB 10, computer software professionals were exempt from overtime laws only if the following compensation requirements were met:
The employee’s hourly rate of pay is not less than thirty-six dollars ($36.00), or the annualized full-time salary equivalent of that rate, provided that all other requirements of this section are met and that in each workweek the employee receives not less than thirty-six dollars ($36.00) per hour worked.
Cal. Labor Code § 515.5(4).
Each year, the California Division of Labor Statistics and Research adjusts this pay rate on October 1 to be effective on January 1 of the following year “by an amount equal to the percentage increase in the California Consumer Price Index for Urban Wage Earners and Clerical Workers.” Id. With the enactment of AB 10, an employee who is paid an annual salary of $75,000 or more at a rate of not less than $6,350 per month paid at least once a month is exempt from overtime laws. This new and simplified compensation requirement is important for at least two reasons.
First, prior to the enactment of AB 10, employees argued that Section 515.5’s annual salary requirements shifted upward each time an employee worked over 40 hours per week. But now that AB 10 provides a minimum annual salary requirement of $75,000 for exempt employees, the argument no longer has merit.
Second, because the hourly rate of pay was required to be no less than $36 (or the annualized full-time salary equivalent of $74,880) under the prior statute, employees would argue that any time an employee worked more than 40 hours in one week, the exemption did not apply because the employee’s hourly rate of pay would fall below $36 per hour each week.
- Because the employee would received less than $36 per hour “in each workweek,” the employee would argue that he or she no longer fit within Section 515.5(4)’s computer professional exemption.
- The argument went so far as to claim that the exemption would be lost for the entire year any time an employee worked more than 40 hours during only one week of the year.
- For example, an employee who received a salary of $74,880 per year and worked 50 hours in one week and 40 hours every other week of the year enjoys an hourly rate of pay of $36 per hour for the weeks he worked 40 hours, but only $28.80 per hour for the 50-hour workweek. As a result, the employee would argue that he was compensated at a rate of less than $36 per hour for “each work week” and thus not eligible for the overtime exemption under Section 515.5(4).
With the enactment of AB 10, the overtime exemption will apply to employees who earn at least $36 per hour or an annual salary of at least $75,000 for full-time employment, which will be adjusted upward on January 1, 2009, in accordance with the California Consumer Price Index for Urban Wage Earners and Clerical Workers.
Now, the computer professional who works 50 hours in one week but 40 hours every other week will continue to be covered by the exemption, even if his hourly rate falls below $36 for each work week, so long as his annual salary is at least $75,000. As a result:
- Employers can now pay computer professionals on either an hourly or a salary basis; and
- Employers who opt to pay computer professionals on a salary basis no longer need to maintain hourly time records to ensure compliance with Section 515.5.
As long as the employee’s annual salary is at least $75,000, and assuming all other requirements have been met, the computer professional will be exempt from California’s overtime laws.
For further information or help in complying with California’s complex wage and hour laws or analyzing the impact of the amended computer professional exemption, please contact any member of the McGuireWoods Labor & Employment or Employee Benefits teams.