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March 14, 2019

Attention “Small” Employers: You May Be a “Large” Employer and Not Even Know It

New rules affecting the state minimum wage and the payment of overtime to agricultural workers have one important number in common—26. That is the number by which, for purposes of these laws, you are either a so-called “large” employer and pay a higher minimum wage and overtime after a lower threshold, or you are a “small” employer and can pay a lower minimum wage and no change to overtime, at least for awhile. But getting to 26 is easier than you might think—especially if you are a “small” employer that uses the services of a farm labor contractor.

Minimum Wage

Most employers with employees in California are aware that on January 1, 2019, the state minimum wage increased to $12.00 for employers with 26 or more employees. For employers with 25 or fewer employees, the state minimum wage increased to $11.00 per hour. These increases came about with the passage of SB 3, which raises the state minimum wage by $1 per year until it reaches $15.00 per hour in 2022 for employers with 26 or more employees. Employers with 25 or fewer employees hit the $15 mark in 2023.

The increased minimum wage also increased the minimum exempt salary that must be paid to meet the so-called “white collar” exemptions (i.e., executive, administrative, and professional). Employers with 26 or more employees must now pay the minimum salary for exempt employees of $49,920 per year. Employers with 25 or fewer employees can pay the minimum salary of $45,760 per year for exempt employees for now.

 

Ag Overtime

Beginning on January 1, 2019, AB 1066 took effect for “large” employers, again defined as employers with 26 or more employees. “Small” employers get a reprieve until January 1, 2022. The law, which Governor Jerry Brown signed in 2016, gradually lowers the daily and weekly hours of work thresholds for paying overtime to agricultural employees. And for the first time, weekly overtime now applies to “large” agricultural employers. This means that instead of overtime being payable for all hours worked after the sixth day in a workweek, overtime also kicks in after 55 hours in a week. Weekly overtime kicks in in 2022 for “small” employers.

The “rule of 26” also holds for the removal of the irrigator exemption. The exemption officially went away for “large” employers on January 1, 2019, while it remains intact for “small” employers until 2022.

 

Are You a “Large” Employer?

Both the minimum wage and overtime laws hold employers with 26 or more employees to stricter standards than those with 25 or fewer. Neither law uses the terms “large” employer or “small” employer, although these terms are convenient substitutes for “employers with 26 or more employees” and “employers with 25 or fewer employees” respectively. Neither law defines what employees are counted for purposes of being a “large” or “small” employer. Because “small” employers can pay a dollar less to meet the minimum wage and do not have to comply with the new overtime requirements until January 1, 2022, many employers that are on the bubble or fluctuate between “small” and “large” depending on the time of the year, or use farm labor contractors, are confused as to whether and when they qualify for small employer status under these laws.

The California Division of Labor Standards Enforcement (DLSE) has not provided any guidance on how it will interpret and enforce the changes to the overtime rules under AB 1066. However, DLSE did issue FAQs on the legislation that increased the minimum wage described above, which uses the same 26/25 employee cutoff. In its FAQs, DLSE noted the following:

•   While the minimum wage statute does not specify what timeframe to use when calculating the number of employees, a court or DLSE will likely focus on the pay period(s) in which the violation occurred.

•   All employees are counted, including exempt employees, regardless of hours worked or location.

•   The employer must make a reasonable and good faith determination of the size of their workforce recognizing that in the case of an ambiguity courts generally take the position most favorable to workers and that an erroneous decision to pay the lower wage could result in costly penalties and back pay awards.

•   Employers in a joint employer relationship need to aggregate and count the employees of all employees under the joint employer’s control.

•   Workers provided by a staffing agency or labor contractor should be counted.

•   If the number of employees fluctuates over 26 during any pay period, employees should be paid the higher wage for that pay period.

In addition, the FAQ stated that because employers are required by Labor Code section 2810.5 to provide workers a “Notice to Employee” upon hire and in advance of changes in the terms of their compensation, the employer must notify all affected employees in writing and wait until the next pay period before switching to a different minimum wage rate.

The Labor Commissioner’s SB 3 guidance, which is available at https://www.dir.ca.gov/dlse/SB3_FAQ.htm, would very likely be applied to analyze the changes introduced by AB 1066. Employers should review the FAQ when determining whether your company is a “large” employer for purposes of the new overtime requirements.

 

The “Integrated Enterprise” Test

Some employers have an interest in multiple companies. Are those employees aggregated for purposes of determining the minimum wage or overtime thresholds? In determining whether an employer with several companies is considered a “single employer” under California law, the employer will be scrutinized under the “integrated enterprise” or “single employer test.” Under this test, if two or more entities effectively operate as a single employer, they are generally treated as a single employer.

To make this determination, California courts look to a variety of factors, including:

•   Are the operations interrelated, such as by payroll, banking, HR functions, and the use of shared employees.

•   Is there common management who have control over the day-to-day operations and employment matters?

•   Is there centralized control of labor relations, such as the power to hire and fire, and control work schedules?

•   Is there common ownership or financial control?

While no single factor above is conclusive, the common ownership and control of labor operations are the most critical factors.

 

Conclusion

•   Employers who are “large” at all times are subject to the higher minimum wage and stricter overtime threshold, while “small” employers are not.

•   A “small” employer is considered a “large” employer during any pay period when its direct hire employees plus FLC-provided employees total 26 or more in the aggregate.

•   In any pay period where an FLC has a total of 26 or more direct hires, the FLC is considered a “large” employer for minimum wage and overtime purposes, regardless of where the FLC’s direct hire employees are working.

•   Even if the “small” employer’s direct hire employees plus the FLC-provided employees total 25 or fewer, if the FLC is itself is a “large” employer, the FLC-provided labor will be entitled to the higher minimum wage and overtime standards.

•   Consider whether employees of commonly-owned or controlled companies should be aggregated under the “single employer” theory.

•   Once your company reaches “large” employer status, the most prudent course of action is to consider your company a “large” employer at all times, even if the number of employees reduces to a level that would qualify the company as a “small” employer.