We have an employee who is classified as an exempt administrative employee and is paid $70,000 a year. He wants to work four days per week, and we are willing to authorize this reduction in work hours if he takes a proportional 20% pay reduction. Does this create any problems?
It may. Employers need to be cautious when reducing the salary of an exempt employee. With one exception, exempt employees cannot be paid less than the minimum salary amount set by law without losing their exempt status. This is true even if the employee is working part-time.
Overtime Exemptions
Employees may be classified as exempt from overtime if they satisfy a duties test and earn a minimum salary mandated by statute. The most common exempt categories are executive (managerial), administrative, and professional.
Although it can be challenging to apply the duties tests to determine whether a particular position is exempt, the minimum salary test is straightforward, strict and easy to apply.
Salary Threshold
Under Labor Code Section 515(a), a properly classified exempt employee must earn a “monthly salary equivalent to no less than two times the state minimum wage for full-time employment.”
Section 515 defines “full-time employment” as 40 hours per week. This does not mean, however, that the exempt employee must work 40 hours per week; it means the minimum annual salary is calculated by multiplying the state minimum wage by two and then multiplying that figure by 2,080, which is the total hours worked in a year based on a 40-hour workweek.
As of January 1, 2025, with California’s minimum wage at $16.50 per hour, the required annual salary for the administrative exemption is $68,640.
In exchange for being relieved of its overtime obligation, the employer guarantees a fixed and regular sum to an exempt employee. “A salaried employee is compensated not for the amount of time spent on the job, but rather for the general value of services performed.” (Abshire v. County of Kern, 908 F.2d 483, 486 (9th Cir.1994)).
Reducing Salary for Reduced Hours
With one exception discussed below, the minimum salary requirement for an employee classified as exempt under the administrative exemption is two times the state minimum wage. This is the minimum amount which must be paid to an exempt employee, and this amount cannot be prorated for part-time work. (Division of Labor Standards Enforcement Manual, Section 51.6.3 (d)).
You cannot reduce your exempt employee’s salary of $70,000 by 20% to reflect the fact that he is working 80% of the workweek yet maintain his exempt status. The reduction will lower his salary below the required minimum of $68,640, and he can no longer be classified as exempt.
Intermittent/Reduced Leave
One exception allows an exempt employee’s salary to be reduced below the minimum amount of two times the state minimum wage.
Both the federal Family and Medical Leave Act (FMLA) and the California Family Rights Act (CFRA) allow employers to reduce the salaries of exempt employees below the minimum threshold if they are taking protected intermittent or reduced-schedule leave (Code of Federal Regulations, Title 29, Section 825.206; California Code of Regulations, Title 2, Section 11090 (e)(4)). Reductions in salary under these regulations do not jeopardize an employee’s exempt status.
Only if your employee is asking to reduce his schedule for a reason covered by CFRA/FMLA, and he is eligible for these leave protections, can his salary be reduced below the minimum salary requirement for the duration of the protected leave. Otherwise, to maintain his exempt status, you must pay him at least $68,640 annually, even if he is working part-time.
Column based on questions asked by callers on the Labor Law Helpline, a service to California Chamber of Commerce preferred members and above. For expert explanations of labor laws and Cal/OSHA regulations, not legal counsel for specific situations, call (800) 348-2262 or submit your question at www.hrcalifornia.com.
