Washington’s Department of Labor and Industries recently announced long-anticipated changes to the rules that govern payment of overtime compensation to white-collar workers performing professional, managerial or administrative work. Announced on December 11, these rules determine whether a Washington-based employee is exempt from overtime compensation under the state’s Minimum Wage Act (MWA). In addition, whether employees are classified as non-exempt under the MWA will impact their eligibility for paid sick leave and meal periods and rest breaks.
To qualify for the white-collar exemptions under Washington’s MWA, employers have the burden to prove three elements: (1) the employee must be paid on a salary or fixed fee basis; (2) the employee’s salary must meet a minimum threshold; and (3) the employee must perform certain job duties.
The new rules impact the second and third elements for exempt status in three ways. First, the rules increase the salary threshold using a multiplier and based on employer size. Second, the rules set a schedule for yearly increases to the salary threshold. Third, the rules modify the duties test used under the MWA to better align with the rules adopted under the federal Fair Labor Standards Act (FLSA).
Changes to the Salary Threshold
On July 1, 2020, Washington’s minimum salary threshold will increase from $250 per week to $675 per week, or 1.25 times the state’s minimum wage. This is equivalent to $35,100 on an annual basis. The threshold will increase incrementally each year until 2028 when it is expected to be about 2.5 times the minimum wage. At this point, the rules will require payment of $1,603 per week or approximately $83,356 on an annual basis. After 2028, the salary threshold will automatically increase whenever the state minimum wage increases. The rules allow a more gradual phase-in for small businesses with fewer than 51 employees.
The table below sets forth the full schedule that was adopted:
1 are based on an estimated Consumer Price Index for Urban Wage Earners and Clerical Workers and may change over time.
*Projections after 2021 are based on an estimated Consumer Price Index for Urban Wage Earners and Clerical Workers and may change over time.
This table applies to nearly all white-collar exemptions with three primary exceptions:
Computer professionals. Exempt computer professionals must be paid according to the following table:
Teachers. Employees whose primary duty is teaching, tutoring, instructing or lecturing in the activity of imparting knowledge and who are employed and engaged in this activity as a teacher may be compensated on a salary or fee basis. The rules expressly state that the new salary requirements do not apply to these teaching professionals.
Outside Salespersons. The new salary thresholds do not apply to outside salespersons. However, the rules still require that outside salespersons be paid on a salary, commission or fee basis. The new rules also retain the requirement that while outside salespersons can have non-sales-related job duties, these duties may not exceed 20 percent of the hours worked in the workweek by the employer’s non-exempt employees.
Determining Employer Size
Employers may choose between two calculation methods. Employers should utilize the method that is most consistent with their business practices:
- Count the number of Washington-based employees (full-time and part-time) who are employed at each step for each year of the new schedule (e.g., count employees on July 1, 2020, on January 1, 2021, etc.); or
- Follow the formula provided by the Employment Security Department for Paid Family and Medical Leave; this formula determines employee count on the basis of the previous quarters.
Don’t Wait until July 1, 2020 – Federal Changes Coming Sooner
On January 1, 2020, the new federal overtime rules become effective. Under the new rules adopted by the U.S. Department of Labor under the FLSA, an employee must earn at least $684 per week to meet the salary threshold for exempt status; this is an increase from $455 per week. The federal salary threshold is higher than the current Washington salary threshold of $250 per week, so employers must pay the new federal threshold on January 1. In addition, the new federal threshold is higher than Washington’s salary threshold will be under the new state rules, so Washington employers should follow the federal rule until 2021, when the state salary threshold will be higher than the federal salary threshold.
Duties Tests Changed
Washington’s new rules also eliminate the “long” and “short” job duties tests, and replace them with a standard test that more closely aligns with federal rules under the FLSA. Critically, however, Washington continues to depart from federal rules in one key way: Washington’s rules do not recognize an exemption for highly-compensated employees, so Washington employers cannot rely on that exemption.
Addressing Impacted Positions
The sweeping changes under Washington’s rules become effective in July 2020, but the state’s salary threshold will continue to climb until 2028. The state anticipates that by 2028, nearly 260,000 positions that were previously exempt under the Minimum Wage Act will be impacted.
Employers have several options to comply with the new federal and state salary thresholds:
- Reclassify exempt positions as hourly, non-exempt positions. Keep in mind that reclassification means more than just paying overtime compensation after employees work 40 hours in a workweek. Non-exempt employees will be entitled to paid sick leave under Washington law. (Seattle and Tacoma based employees are already entitled to paid sick leave regardless of exempt status under local laws, so this will have less impact in these locations.) Non-exempt employees must also be provided meal periods and rest breaks, and failing to provide them can subject employers to wage and hour penalties. Employers who reclassify employees will need to ensure that reclassified employees and their managers are trained on overtime requirements, including any need to seek advance permission before working overtime. This can be a game-changer for many previously exempt employees who are not accustomed to tracking their hours.
- Reclassify the position as salaried, non-exempt. Employers choosing this option will still need to train employees to track hours and report overtime hours. Employers must pay overtime compensation to salaried non-exempt employees who work more than 40 hours in a workweek. These employees will also need to receive meal periods and rest breaks and paid sick leave.
- Reclassify positions and prohibit overtime without prior permission. This may not be feasible in some businesses.
- Maintain exempt status by raising salary thresholds and confirming duties test is met.
What Else Should Washington Employers Do Now?
Remember the Minimum Wage Increases on January 1, 2020. Exempt employee compensation isn’t the only thing increasing. Washington state and Seattle minimum wages for non-exempt employees are set to go up on January 1, 2020.
Conduct an audit. Review your current workforce to determine which employees will be impacted by the new changes immediately, and anticipate which employees will be impacted when the escalated thresholds take effect in 2021. For 2020, exempt employees must be paid $684 per week ($35,568 annually), consistent with federal law. In 2021, exempt employees at smaller employers must be paid $827 per week ($43,004 annually) and $965 per week ($50,180 annually) at larger employers, consistent with the new MWA rules.
Prepare a communication strategy; develop additional policies. Take stock of the positions that these rules impact. Prepare talking points to communicate the changes to employees.
Don’t forget about sick leave and meal periods and rest breaks. An employee who is now non-exempt under the MWA will be entitled to more than overtime compensation. Non-exempt employees will also be eligible to accrue paid sick leave and receive meal periods and rest breaks. This is not a big sea change for Seattle and Tacoma employers, who have been providing sick and safe leave to exempt employees under local ordinances for years, but employers outside the large metropolitan areas will need to adjust to these changes.
Seek legal advice. The intersection of federal and state rules is complicated. Make sure you understand how these rules will impact your workforce. Failing to comply with these rules can be costly in terms of penalties.
Lane Powell’s Lawyers for Employers™ are available to help you conduct privileged audits on exempt and non-exempt status, strategize on how to proceed with impacted positions, and roll out these changes in the coming months. To sign up for our legal updates, click here.