There is a great deal of confusion and uncertainty in the high-tech industry when it comes to dealing with the California computer professional exemption under California Labor Code section 515.5.  This uncertainty is largely due to novelty and complexity of the law and lack of California judicial guidelines on how to apply the exemption. This article is intended to clarify the confusion and provide clear guidance on how to classify computer professionals for purposes of overtime exemption.

Three Myths About California Professional Exemption

First, it is important to dispel some of the myths circulating in the computer industry regarding the computer professional exemption:

1)      Just because an employee is paid a salary, it does not mean that he or she is an exempt computer professional. While a salary is an important factor in determining whether a professional is properly classified as an exempt employee, other factors need to be satisfied as well. Therefore, a software engineer can be a salaried employee and still be entitled to overtime if he works more than 8 hours a day or 40 hours a week.

2)      Just because an employer asks an employee to sign an agreement  purporting to be an acceptance of the computer professional exemption status that does not mean that the employee is exempt from overtime. The contractual language labeling an employee exempt or corresponding job title has nothing to do with classification, what matters is the actual job responsibilities and duties.

3)      Finally, it is a responsibility of an employer to prove that an employee is not entitled to overtime under the computer professional exemption. This means that if there is a legal dispute before the court or state employment agency over alleged misclassification, the burden is on the employer to prove that an employee is exempt.

Applicable Law

The computer professional exemption is a relatively new legislation that was added to California state law by S.S. 88 in September 19, 2000.

According to California Labor Code section 515.5, employees in the computer software field are not entitled to an overtime rate of compensation only if all four requirements are met:

(1)     The employee is primarily engaged in work that is intellectual or creative and that requires the exercise of discretion and independent judgment.

(2)      The employee is primarily engaged in duties that consist of one or more of the following:

(A) The application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software, or system functional specifications.

(B) The design, development, documentation, analysis, creation, testing, or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications.

(C) The documentation, testing, creation, or modification of computer programs related to the design of software or hardware for computer operating systems. 

(3)     The employee is highly skilled and is proficient in the theoretical and practical application of highly specialized information to computer systems analysis, programming, or software engineering. A job title shall not be determinative of the applicability of this exemption.

(4)     The employee’s hourly rate of pay is not less than thirty-six dollars ($36.00) or, if the employee is paid on a salaried basis, the employee earns an annual salary of not less than seventy-five thousand dollars ($75,000) for full-time employment, which is paid at least once a month and in a monthly amount of not less than six thousand two hundred fifty dollars ($6,250). The Division of Labor Statistics and Research shall adjust both the hourly pay rate and the salary level described in this paragraph on October 1 of each year to be effective on January 1 of the following year by an amount equal to the percentage increase in the California Consumer Price Index for Urban Wage Earners and Clerical Workers.

Explanation:

As you can see the threshold criteria for the computer professional exemption is somewhat complex and hard to satisfy. Let’s go over some of the most important elements of the section 515.5.

Salary or Hourly Wage. Despite the fact that this part is straightforward, many high-tech employers ignore it and pay less than the minimum required standard. If a software engineer is paid hourly, his or her hourly minimum wage rate must be not less than $36 (for the year of 2012). For salaried employees, an annual compensation must be at least $75,000.

Highly Skilled and Proficient.  The exemption applies only to those computer-related professionals who possess an advance level of proficiency in the theoretical and practical application of a body of highly-specialized knowledge in computer system analysis, programming, and software engineering. What it means is that trainees or employees in entry level positions who are learning to become proficient in the foregoing areas are not covered under the computer exemption and are entitled to overtime.  By the same token, computer professionals who have not attained a level of skill and expertise that allows them to work independently without supervision are not exempt.

However, the exemption does not require a computer professional to hold an advanced degree (i.e. Bachelor or Master of Science) or certain certification to be qualified for the overtime exemption.

Exercise of discretion and independent judgment. California courts have not yet provided litigants with clear guidelines on how much discretion or independent judgment a computer professional must exercise to be qualified for the computer professional exemption. However, it is useful to look at the cases decided by the federal courts, because the federal computer professional exemption requires the same exercise of discretion and independent judgment (29 C.F.R. §541.3(e).

Employee Must Make Decision Over Significant Matters.

The Fifth Circuit provides that [t]he exercise of discretion and independent judgment necessitates consideration and evaluation of alternative courses of conduct and taking action or making a decision after the various possibilities have been considered. 29 C.F.R. §541.207(a). This exercise of discretion and independent judgment must relate to matters of consequence. 29 C.F.R. §541.207(b)-(c)(1). Final decision making authority over matters of consequence is unnecessary. Lott v. Howard Wilson Chrysler-Plymouth, Inc., (5th Cir. 2000). Further, discretion and independent judgment are distinguished from skills and procedures. For example, an employee who simply uses his skills and knowledge and follows prescribed procedures or protocol is not exercising “discretion” and “judgment.” Nordquist v. McGraw–Hill Broadcasting (Cal. App. 1995)

Employee Must be Free of Direct Supervision.

The “consistent exercise of discretion and judgment” contemplates “the authority or power to make an independent choice, free from immediate direction or supervision and with respect to matters of significance.” Heidtman v. County of El Paso,  (5th Cir. 1999) (quoting, 29 C.F.R. § 541.207(a)).

Employee Does Not Have to be a Final Decision Maker.

Courts have consistently held that final decision-making authority is not a prerequisite to the exercise of discretion. In re Farmers Ins. Exchange, Claims Representatives’ Overtime Pay Litigation, (9th Cir. 2007), the Ninth Circuit explained that “discretion and independent judgment do not necessarily imply that the decisions made by the employee have a finality that goes with unlimited authority and a complete absence of review.” In Cole v. Daniels, Inc., (9th Cir. 2001), the Ninth Circuit held that making recommendations for action is part of exercising discretion and judgment. See also Heffelfinger v. Electronic Data Systems Corp. (C.D. Cal. 2008)

Primarily Engaged in Certain Duties. Labor code defines “primarily” as more than one-half of the employee’s worktime. Not all jobs involving computers are necessarily highly complex and require exceptional expertise. According to Labor Code section 515.5, the following types of computer professional are not exempt and are entitled to earn overtime:

(1) The employee is a trainee or employee in an entry-level position who is learning to become proficient in the theoretical and practical application of highly specialized information to computer systems analysis, programming, and software engineering.

(2) The employee is in a computer-related occupation but has not attained the level of skill and expertise necessary to work independently and without close supervision.

(3) The employee is engaged in the operation of computers or in the manufacture, repair, or maintenance of computer hardware and related equipment.

(4) The employee is an engineer, drafter, machinist, or other professional whose work is highly dependent upon or facilitated by the use of computers and computer software programs and who is skilled in computer-aided design software, including CAD/CAM, but who is not engaged in computer systems analysis, programming, or any other similarly skilled computer-related occupation.

(5) The employee is a writer engaged in writing material, including box labels, product descriptions, documentation, promotional material, setup and installation instructions, and other similar written information, either for print or for onscreen media or who writes or provides content material intended to be read by customers, subscribers, or visitors to computer-related media such as the World Wide Web or CD-ROMs.

(6) The employee is engaged in any of the activities set forth in subdivision (a) for the purpose of creating imagery for effects used in the motion picture, television, or theatrical industry.

Executive and Administrative Exemptions. The computer professional exemption can be applied in conjunction with other California overtime exemptions or independently of them. In certain instances, an employee who fails to meet all four criteria for the computer professional exemption may be qualified under another exemption if his or her managerial or administrative duties satisfy the applicable standard. Heffelfinger v. Electronic Data Systems Corp. (C.D.Cal. 2008)

Why does it matter whether a computer employee is exempt?

An employee who meets all of the requirements of Labor Code section 515 is not entitled to an overtime pay.  Computer-related professionals regularly work long hours including weekends and are paid on a salary-basis that does not count overtime.  The legal consequences of misclassifying non-exempt employees as computer professionals are extremely expensive because the violating employer is likely to be liable for unpaid overtime and other wage and hour benefits for the past four years.  For example, the employer may be liable in the amount of $50,000 per year to a misclassified software engineer who regularly worked around 60 hours a week and earned a salary of $80,000.