California’s minimum wage will rise from $8 to $9 an hour on July 1 this year. And on Jan. 1, 2016, the minimum wage will climb even higher, to $10 an hour.

This has legal and cost implications for California employers beyond the need to increase wages.

Employers will have to recalculate several pay structures to make sure they comply with all applicable wage laws. Among them:

  1. Exempt status. To be categorized as exempt, employees have to earn a monthly salary greater than twice the minimum wage for a full-time employee.  That number is currently $2773.333 per month, or $33,280 per year. After July 1, that minimum monthly salary will rise to $3,120 per month or $37,440 per year.  Thus, employers should undertake a review of their exempt employees to be sure they will still comply with the salary requirements and not lose their exempt status on July 1, 2014. Another review will be necessary when the minimum wage rises to $10 in 2016.
  2. Payroll taxes. With the increase, employers will have to factor in additional payroll and other taxes, such as unemployment and disability insurance, and workers’ compensation. Employers also pay a percentage of employees’ Social Security. So more wages mean a higher Social Security obligation. In short, the more you pay your workers, the more you pay in taxes.
  3. Overtime, vacation, etc. Pay rates for overtime, vacation, sick leave, paid time off, and meal and rest period premiums will also increase. Otherwise, employers face significant liability for wage and hour violations.
  4. The ripple effect. The increase is likely to impact more than just minimum-wage employees. Salaries for employees now earning a level above the current minimum wage might have to be adjusted, as well. Employers will have to determine how many employee levels will require adjustments.
  5. Exempt commissioned salespeople. The “regular rate of pay” for exempt commissioned salespeople is 1.5 times the minimum wage. It will increase to $13.50 in July and to $15 in 2016.
  6. Employees required to furnish the tools or equipment necessary to perform their job must be paid twice the minimum wage. This rate will increase to $18 an hour on July 1and $20 in 2016.
  7. Legal pitfalls. Employers should beware of responding to the increased minimum wage by misclassifying employees as independent contractors. The penalty for “willful misclassification” is as high as $25,000 per employee under the California Labor Code.

If you are an employer who is concerned about the implications of the July 1, 2014 increase in California’s minimum wage, contact Johnson Employment Law for guidance.