Introduction
On July 27, 2022, the Director of the California Department of Finance sent a letter to Governor Gavin Newsome and state legislative officials, notifying them that the high inflation rate over the last year will cause the state’s minimum hourly wage to rise higher than anticipated in January 2023. The higher minimum wage will affect several categories of employees in addition to minimum-wage earners.
Background on California’s Minimum Wage Law
Labor Code section 1182.12 established a series of annual increases to the state minimum wage, causing it to rise from the 2016 minimum wage of $10 per hour, to the 2022 minimum wage of $14 per hour for employers with 25 or fewer employees, and $15 per hour for employers with 26 or more employees. Under subdivision (b) of that statute, in January 2023 the minimum wage for employers with 25 or fewer employees was scheduled to rise to $15 per hour, with no increase in the minimum wage for employers with 26 or more employees, meaning employers of all sizes would then be subject to a uniform minimum wage of $15 per hour.
Other provisions of the statute provide for further annual increases. Specifically, subdivision (c)(1) of the statute requires the Director of Finance, beginning in 2023, to calculate an adjusted minimum wage on or before August 1 of each year based on the United States Bureau of Labor Statistics nonseasonally adjusted United States Consumer Price Index for Urban Wage Earners and Clerical Workers (U.S. CPI-W). The Director is to calculate the increase in the minimum wage by the lesser of 3.5 percent or the rate of change for the U.S. CPI-W, and the result is then rounded to the nearest ten cents, with the adjusted minimum wage increase implemented on the following January 1, beginning in 2024.
However, subdivision (c)(3) provides that if the inflation rate exceeds seven percent in the first year in which the minimum wage for employers with 26 or more employees is $15 per hour (which is this year), the annual increases based on the U.S. CPI-W are to begin a year earlier—in January 2023.
The Department of Finance’s Determination of the 2023 California Minimum Wage
In her letter of July 27, 2022, California Department of Finance Director Keely Martin Bosler announced that the Department had determined the U.S. CPI-W for the 12-month period from July 1, 2021 through June 20, 2022 increased by 7.9 percent compared to the preceding 12-month period and, as a result, the inflation-adjusted annual increases required by the minimum wage statute would begin on January 1, 2023. The Department calculated that the required 3.5 increase will result in a state minimum wage of $15.50 per hour for all employers beginning January 1, 2023, fifty cents higher than the previously anticipated minimum wage of $15.00 per hour.
Ripple Effect of a Higher Minimum Wage
Any increase in the state minimum wage has a ripple effect on several categories of California employees in addition to minimum-wage earners.
California’s salary threshold for “white collar” (executive, administrative, and professional) exempt employees is set at twice the state minimum wage for a 40-hour work week. A $15.00 minimum wage would have established a salary threshold of $62,400 per year ($15 x 2 x 40 hrs x 52 wks). A $15.50 minimum wage will establish a salary threshold of $64,480 per year ($15.50 x 2 x 40 hrs x 52 wks).
California’s overtime exemption for commissioned employees (sometimes referred to as the “inside sales” exemption) applies to employees whose earnings exceed 1.5 times the state minimum wage if more than half the employee’s compensation represents commissions. In order to maintain the exemption for those employees, beginning in January 2023 they must earn at least $23.25 per hour, in addition to earning more than half their compensation from commissions.
As a general rule, when tools or equipment are required for a job, the employer must provide and maintain them. However, a California employee whose wages are at least twice the state minimum wage may be required to provide and maintain hand tools and equipment customarily required by the trade or craft. Beginning in January 2023, those employees must be paid at least $31.00 per hour.
Conclusion
California Employers should begin planning for the higher minimum wage, and budget for this unexpected expense. Employers should also keep in mind that a host of local governments throughout California have their own minimum wage ordinances that often require minimum wages higher than the state minimum, and some local governments may take steps to increase their own minimum wages in response to the higher than anticipated increase in the state minimum wage.
Aaron Buckley – Paul, Plevin, Sullivan & Connaughton LLP – San Diego, CA
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