The Ramifications of California’s Minimum Wage Increase

December 14, 2006

On September 12, 2006, the Governor of California signed legislation raising the minimum wage for workers in all industries from the current rate of $6.75 per hour to $7.50 per hour effective January 1, 2007, and $8.00 per hour effective January 1, 2008. This is the first time in five years that California has raised the minimum wage. The federal minimum wage currently remains unchanged at $5.15 per hour, although a number states have their own minimum wages and there are proposals to raise the federal minimum wage as well.

This increase in California’s minimum wage will have important ramifications for California employers beyond the obvious mandatory wage increase for minimum wage earners, some of which are described below. 

Increased Salary Requirements for Exempt Status

One of the requirements for an employee to qualify as exempt from California’s overtime requirements under the administrative, executive or professional exemptions is that the employee earn a monthly salary equivalent to at least two (2) times the state minimum wage for full-time employment (defined as 40 hours per week). The minimum annual salary to qualify for exempt status is currently $28,080. This threshold annual salary will increase to $31,200 effective January 1, 2007, and $33,280 effective January 1, 2008. Thus, employers may need to increase the salaries for some of their employees to maintain their exempt status.

Increased Hourly Rate to Qualify for the Computer Software Exemption

While not part of the new minimum wage legislation, employers should also be aware that the minimum hourly rate required to qualify for the computer software exemption will also increase effective January 1, 2007 to $49.77 per hour (up from $47.81 per hour in 2006) for each hour worked. This amount is adjusted every year on October 1 to be effective January 1 of the following year.

Exemption for Employees Paid Commissions

Under Wage Orders 4 and 7, employees who otherwise meet the inside sales exemption requirements are exempt from overtime if more than half of their compensation comes from commissions and their weekly earnings for all hours worked are at least one and one half times the minimum wage. Employers relying on the inside sales exemption will need to verify that their employees’ weekly earnings meet this new, higher threshold.

Meal and Lodging 

Meals and lodging costs cannot be credited against an employee’s minimum wage absent a voluntary written agreement between the employer and the employee. The new law increases the maximum amounts for meals and lodging that may be credited against the minimum wage.

Split Shifts

The wage orders require that employers pay a premium of one hour’s pay at the minimum wage, in addition to the minimum wage for all hours worked, if an employee works a "split shift." A split shift is an employer-established work schedule in which an employee’s work period is interrupted by an unpaid, off duty period, other than bona fide rest breaks or meal periods. The California Division of Labor Standards Enforcement has taken the position that employers are only required to pay a split shift premium if the difference between the employee’s total pay at his regular rate for the day and the minimum wage multiplied by the number of hours worked by the employee in the day is less than the minimum wage (i.e., $7.50/hour as of January 1, 2007 and $8.00/hour as of January 1, 2008).

Tools and Equipment

Employers generally must provide and maintain any required tools or equipment necessary to perform the job. However, an employer may require an employee who earns at least two times the minimum wage to provide and maintain hand tools and equipment customarily required by the trade or craft. This amount will increase to $15.00 per hour as of January 1, 2007 and $16.00 per hour as of January 1, 2008.

Employees Covered by Collective Bargaining Agreements

Union employees under certain wage orders are exempt from California’s overtime requirements if, among other things, the collective bargaining agreement provides for a regular hourly rate of not less than 30 percent more than the state minimum wage. Thus the new thresholds will be $9.75 per hour as of January 1, 2007, and $10.40 per hour as of January 1, 2008.

Learners and Certain Other Employees

Learners may be paid not less than 85% of the minimum wage, rounded to the nearest nickel, during their first one hundred sixty (160) hours of employment in occupations in which they have no previous similar or related experience. These hourly amounts increase to $6.40 per hour (rounded up from $6.38 per hour) as of January 1, 2007, and $6.80 per hour as of January 1, 2008. Certain other employees may be paid a percentage less than 100% of the minimum wage under certain conditions.

Payroll Taxes and Contributions

The increase in pay to minimum wage employees will mean higher payroll taxes and other employer payroll contributions. Workers compensation premiums, unemployment insurance costs, social security taxes, and other costs may increase.


Employers may face higher employer contributions for certain employee benefits, such as disability insurance, life insurance, 401(k) matching, and/or pension plans for minimum wage workers.

Posting Requirements

Employers will need to obtain the new minimum wage poster from the state (or other approved provider) and post it.

Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work, or Labor and Employment Practice Group Co-Chair Deborah J. Clarke (213-229-7903, [email protected]) or Elisabeth C. Watson (213-229-7435, [email protected]) in Los Angeles.

© 2006 Gibson, Dunn & Crutcher LLP

The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.