Minimun wage, maximum liability exposure

Earlier this month, Gov. Jerry Brown signed Senate Bill 3, which raises California's minimum wage to $15 per hour by 2022, a 50 percent jump in six years. When the law takes full effect, California will have the highest statewide minimum wage in the nation.

Under the new law, the statewide minimum wage will rise to $10.50 per hour in 2017, $11 per hour in 2018 and then an additional dollar per year until 2022. While the wage hike applies to all hourly employees - the governor's office estimates that 2.2 million Californians earn the minimum wage - firms with 25 or fewer employees will have an extra year to reach $15 per hour.

Much touted was the bill's inclusion of so-called "off-ramps," which purportedly allow pauses in the annual wage raises if economic conditions, such as negative job growth or slow retail sales, warrant. Also, the bill allows the governor to put on hold the next year's wage increase if the state forecasts a budget deficit of more than 1 percent of annual state revenue.

Notwithstanding the bill's purported breaking mechanisms, the minimum wage train has left the station, likely never to return. CPA and State Sen. John Moorlach, R-Costa Mesa, noted that the bill is an "inflection point" in the state's financial history, and there's no going back. What does this mean for employers generally?

Some, like Target, will comply in advance. Target informed its managers this week that it was raising its minimum hourly pay to $10 per hour starting in May. Expect other large employers to do the same. Other employers may leave the state and head to friendlier locales like Arizona and Texas with lower minimum wages. Still others may go out of business or consider automating some tasks to reduce their workforce. Finally, some employers may go off the grid, paying their employees in cash.

Ultimately, those California businesses that comply with the wage hike will have to make up for this increased fixed cost. Moorlach estimates some businesses will have to raise their prices over 20 percent, thereby passing along their increased costs to consumers. Also, layoffs will be another inevitable result as employers struggle to control increased labor costs.

Another way employers may respond is by reclassifying some of their employees. Current exemptions from California overtime laws require employees be paid in excess of, or multiples of, the minimum wage. To wit, under Industrial Welfare Commission (IWC) Order 14, employees engaged in primarily intellectual, managerial or creative roles requiring the exercise of discretion and independent judgment (i.e., managers) are exempt from the overtime rules only if, among other requirements, they earn "not less than two times" the minimum wage.

As a result of the new minimum wage, some managers will get a raise to maintain their exemption; others may be demoted if their employers can't afford to pay them twice the new minimum wage rate. Similarly, under IWC Wage Orders 4 and 7, to be exempt from overtime requirements, commission based employees (sales people) must earn in excess of one and one-half times the minimum wage. Again, some employees subject to this regulation will get raises; others may be demoted or terminated.

Beyond valuating salaries for affected employees, the new minimum wage also means employers should take several administrative steps to ensure compliance: amend their employee manuals, timekeeping practices, payment software and, if applicable, written employment agreements. It also means that any prospective job advertisements, whether offered directly by employers through their websites and per or social media, or published by recruiters, should be updated. Also, businesses utilizing outside vendors for payroll or benefits processing should ensure that these service providers are compliant.

In addition to the increased compliance costs, the thornier - and costlier - issues involve possible penalties, fines, fees and costs for non-compliance. Labor Code Section 1194 provides a private right of action to recover unpaid minimum wages, as well as interest, reasonable attorney fees and costs of suit. Liquidated damages are also recoverable for unpaid minimum wages. Furthermore, failure to pay the minimum wage could also subject an employer to penalties for inaccurate itemized wage statements under Labor Code Section 226, waiting time penalties under Labor Code Section 203, penalties for inaccurate record keeping under Labor Code Section 226, and injunctive relief under Business and Professions Code Section 17200. While individual awards under these claims tend to be small, such claims can be brought as class actions or representative actions under California's Private Attorneys General Act. In such cases, the total exposure for large employers can often amount to millions of dollars if there are hundreds or thousands of employees involved. Thus, plaintiff's attorneys will be on the hunt for non-compliant businesses, and the costs could be considerable, even catastrophic, for businesses found liable.

As California's laws change, firms must be ever vigilant in their compliance efforts. While the non-partisan Legislative Analyst Office predicted that a minimum wage increase would reduce the number of jobs in California's economy, the prediction likely won't apply to California's labor and employment attorneys.

Garrett M. Fahy practices business litigation at Enterprise Counsel Group in Irvine.