The starting point is the key distinction between “exempt” and “non-exempt” employees. Exempt employees as the name implies are not subject to the vast majority of wage and hour laws. Most notably these include California laws pertaining to payment of overtime and the requirement to provide rest and meal periods.

There are three exemptions under California law: Executive, Administrative and Professional, each with their own separate detailed requirements. And no – simply paying your employee a salary does not magically make them exempt. While that is a requirement for exempt status there are additional requirements.

Both the “salary” test and the “duties” test must be met, otherwise your employee is non-exempt. Under California law, the “duties” test requires the employee be “primarily engaged” in exempt duties, including exercise of “independent discretion and judgment.” The employee must engage in exempt duties more than 50% of the time, based on actual measurement of time. The federal test of whether the employee’s “primary duties” consist of exempt duties is less strict. An employee may be exempt under federal law, but not California law.

Many employers, including large employers, misclassify their employees as exempt when they are really non-exempt. The consequences are potentially devastating (see “group” actions). Just ask Farmers Insurance Exchange, Sav-On Drugstores, Microsoft, Intel, WalMart, FedEx, UPS, IKEA, IBM, Long’s Drugs Stores, Abercrombie & Fitch, Bed Bath and Beyond, Verizon, Radio Shack, Wells Fargo Bank, Starbucks, Borders, to name a few, all of whom have been hit with huge wage and hour class action lawsuits since 2000.

Misclassifying your employees as exempt and/or failing to follow wage and hour rules for non-exempt employees can cost your business a lot of money. And you don’t have to be Wal-Mart.

For example, this problem has been magnified by a factor of three for failure to provide rest/meal periods (see Murphy v. Kenneth Cole Productions, Inc. 4/16/2007). After Murphy, the penalty for failing to provide rest or meal periods to non-exempt employees is considered a “wage” subject to a three year statute of limitations (if it was a “penalty” the statute of limitations would be just one year). The “statute of limitations” is legal jargon for how far back the employer is on the hook for damages.

As a result, for each rest or meal period missed, California employers must pay a “wage” of “one additional hour of pay” as far back as three years (and potentially four). At $12/hour, figure out what that would be 5 days a week, 52 weeks for 3 years. Not pretty.