In recent years, California has seen an explosion in labor lawsuits triggered by employee misclassification. Many well-known companies have faced multi-million-dollar class action lawsuits for incorrectly classifying non-exempt employees as exempt. Former prosecutor, prominent Southern California trial attorney Paul P. Cheng, Esq. warns: California’s standards for exempt employee classification are among the strictest in the nation—and even small mistakes can lead to major legal consequences.
“We recently handled a case where a company classified over 20 project managers as ‘exempt,’ but failed to meet California’s 50% duties test. The result? Over a million dollars in back pay and penalties,” said Cheng. “This is not a rare occurrence. Every week, businesses face investigations or lawsuits due to similar missteps.”
According to recent data from the California Labor Commissioner, there were 12,000 wage violation cases in 2023, with 37% involving employee misclassification. Even more concerning, the average settlement amount skyrocketed from $480,000 in 2019 to $2.1 million in 2023.
“Many employers fall into a dangerous trap,” Cheng explains. “They assume that paying a fixed salary or assigning a managerial title automatically qualifies the employee for exemption. But under California law, exemption requires meeting three strict criteria: salary threshold, duties test, and independent judgment.”
Cheng notes that the most commonly misclassified positions include:
- Retail store managers (who spend most of their time on non-managerial tasks)
- Executive assistants (wrongly labeled exempt despite routine administrative duties)
- IT support staff (misclassified under the computer professional exemption)
With California’s minimum wage increasing in 2024, the salary threshold for exempt employees has also gone up. Cheng cautions: “Even if your classifications were compliant last year, they may now be in violation. We recommend conducting a classification audit at least once every quarter.”
“Prevention is always more cost-effective than litigation,” Cheng advises. “A well-drafted job description, routine compliance audits, and timely legal consultations can save your company millions in potential lawsuits.”
Why Misclassification Matters
Incorrectly classifying non-exempt employees as exempt is one of the most common—and most expensive—mistakes employers make under California labor law. Many costly class action cases stem from failure to follow the state’s stringent overtime exemption standards. Understanding the legal distinction between exempt and non-exempt status is vital to compliance and risk prevention.
Key Differences Between Exempt and Non-Exempt Employees in California
California’s rules for overtime exemption are stricter than federal regulations, requiring employers to pass multiple tests beyond just salary levels or job titles.
1. The Duties Test
To be classified as exempt, more than 50% of an employee’s time must be spent performing exempt duties. Simply having a title like “Manager” or “Administrator” is not enough—actual daily responsibilities determine exemption status. The Labor Commissioner will evaluate real-world job duties, not job titles.
2. Salary Threshold
Exempt employees in California must earn at least twice the state minimum wage for full-time work. As of 2024:
- Minimum monthly salary for exempt employees: $5,853.33 (based on $16/hour minimum wage)
- Computer professionals: Must meet even higher hourly or annual salary standards
A fixed monthly salary alone does not qualify an employee as exempt. If job duties or salary fall short of state standards, the employee must be classified as non-exempt and is entitled to overtime pay.
3. Independent Judgment and Discretion
Most exempt employees must regularly and independently exercise decision-making authority, including:
- Evaluating multiple courses of action
- Making significant decisions without direct oversight
- Binding the company in important decisions
Employees who follow set procedures or work under constant supervision—even in higher-level roles—may not qualify for exemption.
Common Exempt Categories in California
Each exemption category has specific criteria:
A. Executive Exemption
Applies to managers who:
- Supervise at least two employees
- Have hiring/firing authority or significant influence
- Spend the majority of their time on managerial duties
B. Administrative Exemption
Covers employees who:
- Perform office or non-manual work related to business operations
- Exercise discretion and independent judgment in key matters
C. Professional Exemption
Applies to licensed professionals (e.g., attorneys, doctors, architects) and roles requiring advanced knowledge or artistic talent.
D. Computer Professional Exemption
For high-tech roles (e.g., software engineers, systems analysts) meeting specific duties and salary standards.
E. Outside Sales Exemption
Applies to employees primarily engaged in sales or contract negotiations outside of the office. Inside sales typically do not qualify.
Illegal Deductions from Exempt Employee Pay
Exempt employees must receive full pay for any week in which they perform work, with very few exceptions. Illegal deductions include:
- Reducing pay for business closures (e.g., holidays)
- Docking pay for partial-day absences
- Cutting pay due to insufficient workload
Such deductions can invalidate exemption status, exposing employers to back pay claims and penalties.
Why Proper Classification Is Critical
Consequences of misclassification include:
- Liability for unpaid overtime wages
- Statutory penalties under California labor laws
- Risk of high-cost class action lawsuits
Employers should routinely review classifications and seek legal counsel to ensure compliance with both state and federal regulations.
Get Professional Legal Guidance
Whether you’re an employer facing classification challenges or an employee who suspects misclassification, the team at PPRCLaw is here to help. Our experienced attorneys provide tailored legal analysis to ensure your classifications are correct—protecting both your business and your rights.
For consultation, contact us today.