Small businesses brace for higher costs, workforce restructuring
December 17, 2019
The state Department of Labor & Industries (L&I) this month adopted a long-anticipated change to its outdated Executive, Administrative, and Professional (EAP) exemptions to the state minimum wage act, more commonly referred to as the state’s overtime rule.
Much has been made of the claim that this is the first update to the state rule in 40 years. While that is technically true, the reality is that Washington’s employers have long been operating under federal overtime regulations, which supersede the state rule by virtue of being more favorable to workers. In fact, the newly minted state rule will continue to be trumped by federal law for the first six months of its existence.
A change to the federal overtime rule will increase the salary threshold to $684 per week, or a $35,568 annual salary, in 2020. Since this surpasses L&I’s planned increase to 1.25 times the state’s soon-to-be $13.50 hourly minimum wage, the more generous federal rule will still govern Washington employers.
Not until January 1, 2021, will the new state rule affect Washington employers. At that point, employers with 50 or fewer workers will be required to pay a salary at least equal to 1.5 times the state minimum wage. Based on L&I data, that should work out to $827 per week, or an annual salary of $43,025. Larger employers, those with 51 or more workers, will be required to pay qualifying salaried employees at least 1.75 times the state minimum wage, or about $965 weekly / $50,196 annually.*
From January 2021 through December 31, 2027, the salary threshold will at times vary between larger and smaller employers (see chart below). Heeding at least some of the input it received during the public hearing process, L&I’s final rule includes a longer phase-in for the salary-threshold increases than did earlier drafts. The new state threshold will ultimately reach 2.5 times the state minimum wage – anticipated to be $83,356 – for all employers in 2028. It will grow with inflation and with minimum-wage increases thereafter.
EMPLOYER SIZE | WORKER COUNT
Questions may arise about determining employer size and, thus, which salary threshold applies to a particular business in certain years. Basically, the new state rule requires employers to count all their Washington-based workers, regardless of whether those workers are full- or part-time. However, L&I will also recognize the worker count that the Employment Security Department will begin providing employers by September 30 of each year for its Paid Family and Medical Leave Program.
“Qualifying workers” is a key element in the new rule. In order to be exempt from overtime, and other requirements of the state’s minimum wage act, qualifying workers must be paid at or above the state’s new salary threshold, and must also meet specific tests to determine if their job duties satisfy the requirements of being an executive, administrator, professional, outside salesperson, or computer professional.
For instance, to qualify as an “executive,” and thereby exempt from overtime, a worker’s primary duty must be management of the business, one of its departments, or a branch location. This must include regularly directing the work of two or more full-time employees or their equivalents; authority to hire or fire employees – or having particular influence in the hiring, firing, or promotion of the firm’s employees; setting or adjusting pay rates and work schedules; handling employee complaints and discipline; determining how and what will be produced and sold; planning and controlling the budget; and ensuring legal compliance. Owners with at least a 20% equity stake, and who are actively engaged in the management of the business, are also exempt from the minimum salary requirements.
Each of the other classifications, hyperlinked above, have their own individual test.
It should be noted that despite requests from NFIB and others in the business community, L&I did not include an exemption for highly compensated employees, as has long been found in the federal overtime rule. Consequently, there is no allowance under the state rule for ignoring the applicable duties test based on any worker’s compensation level. Instead, every salaried employee must meet the duties test for their particular work classification – executive, administrative, professional, outside sales, or computer professional – in order to be eligible for the overtime exemption.
While the new state rule more closely mirrors the federal duties tests, NFIB has asked L&I for guidance about which set of tests – state or federal – will apply, since both have just been part of significant rule changes. We will update NFIB members with L&I’s response.
Meanwhile, our own Small Business Legal Center advises that employers must satisfy all requirements of both federal and state rules, meaning employers must always comply with the most stringent application. The SBLC has summarized the federal duties tests here.
As the chart below indicates, the minimum annual salary for qualifying workers to be exempt from overtime, and other requirements of the state minimum wage act, is expected to exceed $60,000 in 2024. It is likely to be more than $83,000 in 2028.
There is little doubt these “minimum” salaries will be far more than many small employers, particularly those in our state’s more rural areas, will be able to afford. Consequently, employers will be forced to consider reclassifying some salaried employees as hourly workers.
NFIB will continue to update its members as these and other issues related to rule implementation are addressed.
The official text of L&I’s updated rule, showing the changes between the new and old versions, can be found here. An easier-to-read version of the new rule is available in WAC 296-128-500 through -545.
L&I has also posted a rule summary and Q&A.
Questions should be directed to the local L&I field office (a dropdown list is available here), or to the department’s employment standards and workplace rights division at (866) 219-7321.
*Please note that the projected state minimum wage, and corresponding salary thresholds, for 2021 and beyond is based on L&I estimates of an average annual cost-of-living increase of 2.17%. Each September, L&I announces the official state minimum wage for the following year.
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