California's 2026 salary floor for exempt staff, and the payroll bill behind it
Starting January 1, California's exempt employee salary threshold rises to $70,304. Small businesses must audit payroll to avoid misclassification penalties that stretch back four years.
On January 1, California's minimum salary for exempt employees rises from $68,640 to $70,304. That $1,664 jump affects how small businesses classify workers, pay overtime, and manage payroll across executive, administrative, and professional roles. Many employers miss this annual adjustment, creating compliance exposure that can be expensive.
California ties exempt thresholds to the state minimum wage—currently $16.90 per hour for most employers—requiring exempt workers to earn at least twice what a full-time employee earns at minimum wage. As the minimum wage rises each year, so does the bar for who qualifies as exempt.
The salary threshold and how it works
Effective January 1, 2026, California employers must pay most exempt workers at least $70,304 per year. This figure comes from a straightforward formula: the state minimum wage multiplied by 2, multiplied by 2,080 hours (a standard 40-hour week for 52 weeks). At $16.90 per hour for 2026, that equals $70,304.
The salary must be fixed and guaranteed. Employers cannot build to this threshold using bonuses, commissions, or other variable pay. If an exempt worker earns a base salary of $50,000 plus $20,000 in discretionary bonuses, the exemption likely fails because only the guaranteed portion counts. California's Department of Industrial Relations clarified this to prevent employers from using unpredictable pay to meet minimum salary requirements.
These thresholds apply statewide, but some counties impose higher minimum wages. In Berkeley, the minimum wage is $19.18 per hour, which raises the exempt threshold to approximately $79,789 annually. Emeryville's $19.90 minimum wage pushes the exempt threshold to approximately $82,804. Employers operating in multiple counties must use the applicable threshold for each location.
The three-part test for exemption
Salary is only one part of the exemption test. Under California Labor Code section 515, exempt status requires three things: the right salary, the right job duties, and the right use of judgment. Employers who skip this analysis—assuming that a high title or salary alone qualifies a worker—risk serious liability.
On duties, a worker must spend more than half the work week performing executive, administrative, or professional tasks. An office manager earning $75,000 who spends 40% of time answering phones and scheduling cannot be classified as exempt, even at that salary. The law asks whether the employee's primary responsibility is discretionary work that supports the business, not just whether they earn enough.
Judgment is the third requirement. Exempt workers must 'use their discretion and independent judgment while performing these job duties.' This means making decisions without seeking approval, interpreting company policy, or directing other workers' activities. A technical support specialist earning $75,000 who follows a script and escalates complex issues to a supervisor does not meet this test.
Specialized roles and higher thresholds
Some jobs require much higher pay to qualify as exempt. Computer software developers, mathematicians, and similar professionals must earn at least $122,573.13 per year starting January 1, 2026—up from $118,657.43 in 2025. This reflects both inflation adjustments and Labor Code section 515.5's requirement that computer professionals perform 'intellectually or creatively focused work that necessitates discretion and independent judgment.'
Licensed physicians and surgeons must earn at least $107.17 per hour in 2026 under Labor Code section 515.6. Fast-food restaurants covered by AB 1228 must pay exempt employees at least $83,200 per year, regardless of their state's general threshold. These specialized rules recognize that compensation norms differ across industries.
Outside salespeople and certain commissioned employees have different rules. A commissioned salesperson earning at least 1.5 times the minimum wage, with over half their pay from commission, can qualify for exemption without meeting the general salary threshold—but they must still perform appropriate duties.
“Misclassifying a non-exempt worker as exempt can trigger four years of unpaid overtime claims plus penalties, making it one of California's most expensive wage-and-hour mistakes.”
The compliance burden and cost of mistakes
Misclassifying a non-exempt worker as exempt is one of California's most expensive wage-and-hour mistakes. If an employer misclassifies an employee, they owe all unpaid overtime from the past four years, plus penalties under PAGA (the Private Attorneys General Act), which lets employees sue on behalf of the state. One misclassified employee earning $60,000 per year could trigger $40,000 or more in back wages and penalties, depending on the hours worked.
California's courts and Labor Commissioner have repeatedly rejected arguments that employees knew they were exempt or agreed to the misclassification. Exempt status is determined by facts, not by contract.
Employers should audit exempt payroll before the end of the year to ensure everyone earning below $70,304 is reclassified as non-exempt effective January 1. This includes anyone who became exempt under last year's threshold but falls below this year's number due to raises or position changes.
What small businesses should do now
Payroll and HR teams need a complete list of exempt employees with their current salaries and a review of whether each meets all three parts of the test. Any employee earning below $70,304 should be reclassified as non-exempt, meaning they are owed overtime pay at 1.5 times their regular rate for hours over 8 per day or 40 per week. This is not optional or negotiable.
For employees reclassified as non-exempt, employers should adjust payroll systems and establish a method for tracking hours, since exempt employees often do not. Some employers convert classified employees to hourly wages; others keep salaries but track time and pay the overtime difference. Both approaches are legal, though tracking can be administratively complex for businesses without time-clock systems.
Employers should also review local ordinances. If a business operates in Berkeley, Emeryville, San Francisco, or other high-wage jurisdictions, the local minimum wage determines the exempt threshold, not the state rate. An employee earning $75,000 is exempt under state law but may not be under Berkeley's $19.18 minimum wage threshold of roughly $79,948.
Related coverage: How California's minimum wage rules actually work; How California's reformed PAGA changes employers' lawsuit exposure.
