Your salaried manager needs $72,384 on 1 January or they go back on the clock

Two numbers move in California on 1 January 2027. The minimum wage goes from $16.90 to $17.40, which costs you about $1,120 a year for every full-time hourly person once payroll tax is counted. The second number gets much less attention and is where the money usually is: the minimum salary for a manager you treat as exempt from overtime goes to $72,384. Pay a salaried manager less than that on 1 January and they are not exempt any more. They are back on the clock, with daily overtime and meal break penalties attached, whatever their job title says.

Where $72,384 comes from

California does not publish an exempt salary threshold as a separate policy. It falls out of the minimum wage automatically.

Labor Code section 515(a) lets an employee be exempt from overtime only if they are, among other things, someone who "earns a monthly salary equivalent to no less than two times the state minimum wage for full-time employment". Section 515(c) defines full-time employment as 40 hours a week.

So the sum is fixed and the Department of Industrial Relations spells it out: $17.40 x 2 x 40 hours per week x 52 weeks per year = $72,384.

The same sum on today's $16.90 gives $70,304. The floor is going up by exactly $2,080 a year.

One detail that catches out owners in Los Angeles, San Francisco, West Hollywood and everywhere else with its own ordinance. The statute says "the state minimum wage". A higher local rate raises what you pay your hourly staff, and DIR is clear that "employers must comply with the higher local rate", but it does not raise the exempt salary floor. There is one threshold for salaried managers, and $72,384 is it.

Do the sum for each salaried person this week

You need a list. Every person you pay a fixed salary and do not pay overtime to. For most owner-operated businesses that is one to three people: a general manager, maybe a head stylist or head therapist, maybe a bookkeeper.

Against each name, write their annual salary. Anyone under $72,384 on 1 January has to be dealt with, and there are only two answers.

There is no part-time version of this. The threshold is a full-time number and it does not scale down. A manager on four days a week at $58,000 is under the floor and cannot be exempt, even though $58,000 for four days is a good salary. California simply does not allow a part-time exempt employee at that salary.

Option one: lift the salary. What it costs

Say your manager is on $68,000.

The gap to the floor is $4,384. Add your 7.65% share of Social Security and Medicare and the real cost is about $4,719 a year.

That is the whole cost, and it is predictable. It also quietly resets what everyone below her expects, which is the part to think about before you announce it.

Option two: put her on the clock. What that costs

This is where owners guess, and the guess is usually wrong in whichever direction suits them.

Convert her salary to an hourly rate the usual way, $68,000 divided by 2,080 hours, and you get $32.69 an hour. Now count what she actually works.

California pays overtime by the day, not just the week. Labor Code section 510(a) requires time and a half for "any work in excess of eight hours in one workday and any work in excess of 40 hours in any one workweek", and double time beyond 12 hours in a day.

• She genuinely works 40 hours. Reclassify her, pay $32.69 an hour, and you save the $4,384. This is a real answer and plenty of businesses should take it.
• She works 48 hours, which is what most managers in this trade actually do. Eight overtime hours a week at a $16.35 premium is $130.80 a week, $6,802 a year, about $7,322 with payroll tax on top. Raising her to the floor was the cheaper option by roughly $2,600.

Then there is the cost nobody prices in. Once she is non-exempt she gets meal and rest breaks, and if she does not take them you owe a penalty. The rule is one additional hour of pay at her regular rate for each workday a meal period is not provided, under Labor Code section 226.7. At $32.69 an hour, a manager who eats at the desk every working day is about $8,500 a year in premiums alone, and that is before the rest break side of it.

A manager who has run the shop her way for six years does not start taking a clean 30 minute break by the end of her fifth hour because you sent an email. That is the honest reason reclassification goes wrong: the pay change is easy and the behaviour change is not.

The trap that has nothing to do with January

Here is the part that matters more than either option, and it is already true today.

Paying someone $72,384 does not make them exempt. The salary is one of three tests. They must also be "primarily engaged in the duties that meet the test of the exemption" and "customarily and regularly exercise discretion and independent judgment". And California defines primarily with a number: section 515(e) says "primarily" means more than one-half of the employee's worktime.

Read that against your actual week. A salon manager who is behind the chair with clients 60% of her hours is not primarily engaged in management. A cafe manager who works the bar through both rushes and does the ordering at 4pm is probably not either. A gym manager who takes 15 classes a week is not.

If that is your business, the person has been non-exempt all along, and you have been carrying unpaid daily overtime and meal period premiums the whole time. January does not create that problem. It just makes it far more likely to surface, because this is the month everyone in California re-examines their salaried staff and the trade press tells your manager to check her own paperwork.

The fix is not a bigger salary. It is either changing what the job actually consists of, so the exempt duties really are the majority of the week, or accepting the person is non-exempt and paying them properly from now on.

The 50 cents, since it is also happening

Briefly, because the salaried question is the expensive one.

The hourly rise is 50 cents, so $1,040 a year for someone on 2,080 hours, about $1,120 with payroll tax. Six full-timers on the floor is roughly $6,700 a year.

The knock-on is the usual one. Your experienced stylist on $18 was $1.10 above the floor and is now 60 cents above it. If you leave that alone, the gap between your best person and your newest hire keeps shrinking until they notice, and in a business where the good people are the product, they always notice. Our guide on staff scheduling and labour cost covers how to fund that without simply lifting everybody.

What this does to what the business is worth

Wage and hour exposure is one of the first things a buyer's advisers look for in a California service business, and misclassified managers are the classic finding. It rarely shows up as a lower price. It shows up as money held back at completion until the claim window passes, plus an indemnity you sign personally. Unlike most diligence findings, this one is cheap to fix in advance and expensive to fix in the middle of a deal.

There is a second reading, and it is the more useful one. A manager who is genuinely exempt is a manager who genuinely runs the place: hires, sets the rota, handles suppliers, makes calls without ringing you. A manager who fails the duties test is usually failing it because you are still doing the managing and she is filling gaps on the floor.

That is the same thing a buyer means by owner dependence. So the January paperwork exercise is worth doing properly for a reason that has nothing to do with the Labor Code: if you cannot honestly say that more than half of your manager's week is spent managing, you do not have a second in command yet. You have an expensive senior employee, and a business that still needs you in the building. Our exit readiness score is a decent way to see how much of the business currently runs through you.

Dates

The new rate applies to hours worked from 1 January 2027. There is no phase-in and no small business carve-out; California's separate small employer schedule ended years ago and the certified rate applies to all employers.

The salary floor applies from the same day, and it is measured on what the person is actually paid over the year. A raise dated February does not fix January.