L&I’s new overtime rules increase the salary threshold to 2.5 times the minimum wage

By: Emily Makings
10:36 am
December 13, 2019

The Department of Labor & Industries (L&I) has approved new overtime rules for executive, administrative, and professional (EAP) employees. In order to be exempt from overtime requirements, EAP employees must be paid a salary that meets a specified threshold and their duties must primarily be executive, administrative, or professional. Washington’s current salary threshold for this exemption is $250 per week; because it is below the current federal salary threshold of $455 per week, the federal threshold applies.

L&I’s new rule changes the duties test so that it is more consistent with the federal duties test and it significantly increases the salary threshold. When fully implemented in 2028, Washington’s salary threshold will be 2.5 times the minimum wage (estimated to be $1,603 per week in 2028, or $83,356 annually). (For computer professionals, the new salary threshold is 3.5 times the state minimum wage effective Jan. 1, 2022.)

The new rule will apply to all businesses in the state, but the implementation period is longer for smaller businesses: The threshold of 2.5 times the minimum wage will apply to businesses with 51 or more employees as of Jan. 1, 2027 and it will apply to businesses with one to 50 employees as of Jan. 1, 2028. The table (from L&I) below shows the implementation schedule:

And this table (also from L&I) includes the phase-in schedule for computer professionals:

The new state rule is effective July 1, 2020, and at that time, the rule’s threshold for all businesses in the state is scheduled to be 1.25 times the minimum wage ($675 per week or $35,100 annually). However, the federal government adopted a new EAP salary threshold in September. Under the new federal rule, the federal threshold will be $684 per week, effective Jan. 1, 2020. Thus, the prevailing salary threshold in Washington will be $684 per week for the full year in 2020. On Jan. 1, 2021, the state threshold will increase above the federal threshold. That means that the salary threshold in 2021 will be 1.5 times the minimum wage (estimated to be $827 per week, or $43,004 annually) for businesses with one to 50 employees and 1.75 times the minimum wage (estimated to be $965 per week, or $50,180 annually) for businesses with 51 or more employees.

According to the cost-benefit analysis, L&I opted to tie the salary threshold to the minimum wage in order to ensure “regular and automatic updates to prevent the salary level from eroding” and “to help ensure the salary level is continuing to reflect an appropriate dividing line between exempt and nonexempt employees.”

Under the Administrative Procedure Act, agencies must determine that the benefits of a rule will exceed its costs. In the final cost-benefit analysis (CBA), L&I estimates that the rule will cost $13.65 million annually over the next 10 years, but that it will result in benefits of $18.33 million to $18.91 million.

As I discussed in a post about the proposed rule, the majority of these benefits come from the fact that more employees would be covered by the minimum wage act (MWA), which mandates paid sick leave. (Note that there is no data on the number of Washington employees who already receive paid sick leave, whether mandated under the MWA or offered voluntarily by their employers. The cost-benefit analysis therefore relies on data from the Bureau of Labor Statistics that show that 87 percent of workers in the Pacific region have sick leave.) The identified costs include only those related to employers’ administration of the new rule (mostly from scheduling and monitoring employees’ work hours).

The CBA considers increased payroll costs from the rule to be “transfer payments” from employer to employee, “so they cancel out.” In 2020, payroll increases would be $36.3 million, according to L&I—on top of the $13.65 million in payroll costs included in the CBA. The table below (from L&I) shows estimated payroll increases due to the rule by year. In 2028, when the rule is fully implemented for all employers, payrolls increase by $92.07 million to $100.66 million. (L&I notes that it “is not required to consider transfer payments in its final [CBA], because such payments are equally valued as between employers and employees” but it “chose to analyze these payments to provide stakeholders additional information about the relative costs and benefits of the transfer payments that may occur with the rules update.”)

The final small business economic statement finds that the new rules “will impose more than minor costs.” However, “there is insufficient data to determine the size of the cost impact between large and small employers to calculate disproportionate impacts.” To reduce the rule’s impacts on small business, L&I delayed the phase-in of the rule (full implementation will now occur two years later than originally proposed), aligned the state duties test more closely with the federal test, and developed an outreach program to inform small businesses about the rule.

The AP reports,

The federal government and several states, including California, New York, Pennsylvania, Colorado, Michigan and Massachusetts, have recently updated or started to update their overtime rules, but none have adopted a target threshold as high as Washington’s, said Paul Sonn, state policy program director with the National Employment Law Project.

(California and Alaska have salary thresholds set at twice their state minimum wages.)

All told, there will be considerable changes to wage policy in Washington beginning in 2020. The overtime threshold will increase from $455 per week to $684 per week. Also, the minimum wage makes its final jump under I-1433—on Jan. 1, it will increase from $12 to $13.50. In future years, the minimum will be indexed to inflation, and the overtime salary threshold will be tied to the minimum wage.

Categories: Categories , Employment Policy.