L&I’s cost-benefit analysis of its proposed overtime rule relies on the estimated benefits of extending paid sick leave coverage

By: Emily Makings
10:47 am
June 21, 2019

As part of its proposed overtime rule earlier this month, the Department of Labor & Industries (L&I) released a preliminary cost-benefit analysis and a preliminary small business economic impact statement.

As proposed, the rule would increase the state salary threshold for the executive, administrative, and professional (EAP) exemption from the minimum wage act to 2.5 times the minimum wage (which automatically increases with inflation). This means that the threshold would increase from $455 per week (as per the current federal threshold) to about $1,536 per week when the rule is fully implemented in 2026.

(The minimum wage act—including minimum wage, paid sick leave, and overtime provisions—does not apply to “any individual employed in a bona fide executive, administrative, or professional capacity or in the capacity of outside sales person as those terms are defined and delimited by rules of the director.”)

The proposed rule would also replace the two current state duties tests with one that “largely aligns with federal rules.” According to L&I, 252,915 more employees in Washington would be subject to overtime under the proposal when fully implemented than are currently. That said, L&I notes that there is no data set that identifies workers that are currently exempt from the minimum wage act.

The cost-benefit analysis estimates that the proposed rule would increase annualized administrative costs (costs of scheduling and monitoring work hours, reexamining and adjusting exemption status, and learning and adapting to the new rule) by $16.4 million and quantitative annualized benefits by a range of $19.8 million to $20.5 million. These benefits are all a result of more employees potentially gaining paid sick leave under the rule. (L&I’s analysis here follows that of its cost-benefit analysis for the 2017 paid sick leave rule and assumes savings from reduced job turnover, reductions in the flu, and less spending on short-term nursing home stays.) (But note that L&I can only estimate the number of workers who already have paid sick leave based on U.S. Bureau of Labor Statistics data on Pacific region workers.)

The $16.4 million in costs does not include the payroll costs of overtime payments to workers who would become eligible under the rule, the costs of increasing worker salaries so they can remain exempt, or the costs of hiring additional workers to avoid overtime or replace other workers taking sick leave. Instead, these costs are considered transfer payments, as “the costs to employers are equally-valued benefits to workers.” These are estimated to total $58.8 million in 2020, with $38.5 million of that due to overtime coverage changes, $10.7 million due to minimum wage coverage, and $9.7 million due to paid sick leave coverage. (Note that the small business economic impact statement states that these transfer costs are estimated to total $61.8 million—that may be a vestige from an earlier estimate.)

Further, L&I estimates that transfer payments due solely to overtime costs will be $495 per worker in 2020. Based on that, transfer payments related to overtime costs are estimated to increase from $38.5 million in 2020 to $125.27 million in 2026.

Although L&I considers these payroll costs transfer payments for purposes of the cost-benefit analysis, it states that it proposed phasing in the rule over time “in part to reduce the potential challenges and burdens associated with the update and to minimize potential employer disruptions.” Additionally, L&I argues, “Providing for automatic updates reduces these potential compliance costs, offers employers and employees more predictability, and allows salary level increases to occur gradually. It is therefore a less burdensome alternative to irregular updates provided through formal rulemaking.”

According to the small business economic impact statement, “These costs and transfer payments will affect business of all sizes who employ EAP workers.” To reduce costs on small businesses, L&I notes that it is phasing in the salary thresholds more gradually for small businesses, aligning the duties test with the federal one, and developing an outreach and education program.

The cost-benefit analysis also provides more information about why the threshold was chosen:

A multiplier of 2.5 times the minimum wage is the middle range of the historical ratios, provides for a 50th salary level that is consistent with the percentile of the weekly earnings for salary workers in the West Census Region, and is slightly above the updated real value of the 1970 short test.

The weekly earnings of workers in the West Census Region was a factor used in development of the 2016 federal overtime rule, which would have increased the federal salary threshold from $455 a week to $913 a week. (Often in the cost-benefit analysis, L&I points to the 2016 federal rule as a source or rationale for its estimates.) But the 2016 rule was suspended before it could take effect and the federal government has since proposed new overtime rules.

The 2016 federal rule was found by a U.S. District Court judge to be “unlawful” because Congress had

directed the Department to exempt from overtime pay employees who perform ‘bona fide executive, administrative, or professional capacity’ duties. However, the Department creates a Final Rule that makes overtime status depend predominately on a minimum salary level, thereby supplanting an analysis of an employee’s job duties.

Essentially, the U.S. Department of Labor “exceeded its authority.”

Categories: Categories , Employment Policy.