California Makes Dramatic Change to Overtime Exemption for Computer Professionals

On September 23, 2008, Governor Arnold Schwarzenegger signed into law an urgency bill that dramatically changes California's overtime exemption for computer professionals. This bill affects an estimated 250,000 employees in California and changes the recordkeeping requirements for employers.

Previously, California law only exempted computer professionals from overtime requirements if the employee was primarily engaged in intellectual or creative work, the employee's hourly rate was not less than $36.00 for all hours worked, and the employee met all other requirements under the statute.

The amendment to Labor Code §515.5 eliminates overtime wages for computer professionals if they earn at least $75,000 annually working full time, or $6,250 per month and meet the other requirements for the overtime exemption. The salary level will be adjusted each year for inflation in accordance with the California Consumer Price Index, which is released each year on October 1. Any increase in the hourly rate and salary requirements will be effective January 1, 2009.

New Law

The California Labor Code previously provided that an overtime exemption for computer professionals applied only if the computer professional's rate of pay was not less than $36.00 per hour with no annualized restriction. This required employers to keep track of actual hours worked by computer professionals, even if the employee was paid on a salary basis, in order to pay overtime wages if they worked over eight hours in a day or over 40 in a week. Under the amendment, an employer who pays its computer professionals at least $75,000 per year will not be required to record the employee's hours, bringing this exemption in line with other overtime exemptions that are based on salary not hourly rates.

Under the amendment, a computer professional now is exempt from overtime wages if the employee is:

  • highly skilled and proficient in the theoretical and practical application of computer systems analysis, programming or software engineering; and
  • primarily engaged in work that is intellectual or creative and requires the exercise of independent judgment; and
  • paid at least $36.00 an hour; or 
  • paid on a salary basis and earning not less than $75,000 per year for full-time employment; or 
  • paid at least once in an amount not less than $6,250 per month

This exemption generally does not apply if the employee is an engineer, drafter or machinist. In order to qualify for this exemption, an employee must be full-time and work 40 hours per week. The employee must be paid his or her full salary for any week in which he or she performs any work. Compensation must be paid at a predetermined amount on a weekly, bi-weekly, semi-monthly or monthly basis.

A part-time computer professional may qualify as exempt from overtime if he or she is paid a salary of at least $75,000 a year. If the part-time employee is paid on a hourly basis, he or she must be paid at least $36.00 an hour to qualify for the exemption. However, timekeeping records are still necessary to maintain the exempt status of the part-time employee.

Significantly, the amendment changes the duties requirement of the exemption applying it to employees engaged in computer systems analysis, programming or software engineering. Prior to this change, Section 515 permitted the exemption for employees working in computer systems analysis, programming and software engineering. This lead to an interpretation that an employee could be exempt from overtime only if he or she were engaged in all three areas at once.

What This Means For Employers

This amendment is a dramatic change to the Labor Code and should reduce the number of class action suits against California employers for overtime pay for computer professionals. It allows employers to treat computer professionals as exempt and pay them as infrequently as once a month. It eliminates timekeeping for computer professionals paid at least $75,000 annually and permits employers to pay employees a salary. If the employee is paid at least the minimum salary of $75,000, additional hourly wage payments are no longer required. This amendment effectively provides payroll relief and certainty to employers who were faced, under the previous law, with shifting salary requirements based on the number of hours over 40 a computer professional worked in a week.

Employers should review their payroll procedures and job descriptions to ensure that their California computer professional employees, classified as exempt for overtime purposes, meet both the salary test and the duties test for this exemption. Employers with multi-state operations must keep the federal exemption in mind when making national compensation decisions.

For more information about this Client Alert, please contact:

Michael Kun
Los Angeles
[email protected]