Governor Arnold Schwarzenegger and Democratic leaders in the California State Senate reached a compromise Monday that will increase California’s Minimum Wage to $8 over the next two years, making California’s minimum wage the highest in the nation. 

The bill, which is expected to be signed into law as early as August 31, provides for a 75-cent increase over the current minimum wage effective January 1, 2007 (raising the minimum wage to $7.50 per hour), and another 50-cent increase effective January 1, 2008.

For companies currently paying their employees at rates below the new minimum wage, the implications are obvious. However, the minimum wage increase has potential implications for all employers. 

The California Wage Orders mandate that employees classified as exempt Executive, Administrative, or Professional employees must be paid on a salary basis at a rate twice the state minimum wage for full-time monthly employment. An increase in the minimum wage necessarily means an increase in the minimum salary level for these employees. Assuming the minimum wage hike becomes law, the minimum monthly salary for these employees will be raised to $2,600 for calendar year 2007. After January 1, 2008, the minimum monthly salary for these exempt employees will increase to $2,773.33. Employers should review the salaries being paid to all Executive, Administrative and Professional exempt employees to ensure that those employees continue to satisfy these minimum salary requirements, as well as all other elements of the exemptions. (The minimum wage hike will not affect compensation for employees covered by the computer professional exemption. Employers will need to continue to pay employees classified as exempt under the computer professional exemption based on the minimum hourly rate established by California’s Division of Labor Statistics and Research each year.)

In addition, employers must remember that employees who are classified as exempt under the commission sales exemption in Wage Orders 4 and 7 must earn 1 and ½ times the minimum wage for all hours worked to qualify for the exemption. These employees will need to earn $11.25 per hour for all hours worked in 2007 and $12 per hour for all hours worked in 2008 to continue to qualify for the exemption.

Employers who require employees to provide their own hand tools because their trade or craft customarily requires them to provide tools and equipment must also ensure that all such employees are paid at least twice the state minimum wage for all hours worked. 

The minimum wage increase will also affect the minimum hourly rates that union employees must receive to qualify for the state overtime exemptions, the split-shift premium rate, the meal and lodging credits, and the uniform maintenance allowance.