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News / Business / Clark County Business

L&I proposal would drastically change state’s overtime rules

Proposed increase in pay threshold for salaried workers creates concern, confusion for businesses, nonprofits

By Anthony Macuk, Columbian business reporter
Published: July 7, 2019, 6:03am

Washington’s Department of Labor & Industries unveiled a set of proposed changes to the state’s overtime rules last month, proposing a substantial overhaul that has the potential to affect hundreds of thousands of paychecks statewide, including workers in Clark County.

The changes aim to provide what L&I characterizes as a long-overdue update to the state’s salary threshold for overtime-exempt workers, which hasn’t been updated since the 1970s.

“So many things have changed in those 40 years,” says L&I spokesman Tim Church.

But the scale of the proposal — which could more than triple the minimum allowed salary for some categories of white-collar workers — has caught the business community by surprise and led to complaints that L&I is jumping too far, too fast. The new rules may be finalized later this year.

Stagnant minimums

Compensation for full-time employees is generally structured in one of two ways: an employee is either hourly, meaning they are paid a fixed amount of money per hour of work, or they are salaried, meaning they are paid a fixed amount of money per pay period regardless of the number of hours worked.

Under federal law, hourly employees who work more than 40 hours per week must be paid at a higher rate for their overtime hours. Salaried employees also need to be paid extra for overtime, but executive, administrative and professional workers who meet certain criteria are considered exempt from that rule.

On its website, L&I outlines the assumption behind the exception: executive, administrative and professional staff are “typically ‘white collar’ workers who often have more economic security and greater bargaining power than low-wage workers.”

But that rationale only holds up if the exempt workers are highly paid. That’s why the state and federal governments both set minimum salaries for overtime-exempt workers, in order to prevent a situation in which an employer could compel their low-wage employees to work more than 40 hours per week but classify them as salaried in order to avoid paying them overtime.

Those minimum thresholds are not tied to inflation and have remained stagnant for years or even decades, resulting in a salary threshold that is dramatically out of step with what would be considered a high-wage salary in today’s dollars. It has even fallen below the rate set by the state’s minimum wage for hourly workers.

“There are people who are salaried who, if they were hourly, would be making significantly less money than the minimum wage,” Church says.

$13,000 per year

Washington’s minimum salary threshold was last updated in 1976 and was set at $250 per week, or $13,000 per year. The state’s minimum wage has been raised more than two dozen times since then, and now stands at $12 per hour, or $24,960 per year, assuming 40-hour workweeks — nearly twice the minimum for salaried workers.

The federal salary threshold was raised to $455 per week or $23,660 per year in 2004, and that higher minimum supersedes Washington’s threshold in most cases. But it’s still lower than the state’s minimum wage, and the gap is only going to increase — the minimum wage is set to rise to $13.50 in 2020 and then be adjusted in every subsequent year based on the Consumer Price Index.

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The rising minimum wage was mandated by Initiative 1433, which Washington voters approved in 2016. It’s one of several big recent or upcoming changes to the state’s employment laws, along with the paid family and medical leave program, mandatory paid sick leave and restrictions on the use of noncompete agreements (see story above).

The U.S. Department of Labor also announced an update to the federal salary threshold in 2016, raising it to $913 per week, or $47,476 per year, but several states sued and the decision was blocked in U.S. District Court before it could go into effect.

The federal-level interest — and the host of other updates to Washington’s labor laws — prompted L&I to take a renewed look at the state’s own salary threshold, Church said.

In the 1970s. approximately 60 percent of salaried workers in the state were still eligible for overtime because they made less than the $13,000 threshold (equivalent to about $58,000 in 2019), according to Church. Today, less than 10 percent of salaried employees qualify for overtime.

“We’ve got people who are making less than $30,000 and are salaried without (paid) overtime, is what it comes down to,” he says.

L&I began work last year on an update to the state’s rules, and last month the agency unveiled its draft proposal, which would set the overtime-exempt salary threshold at 2.5 times the state’s minimum wage and update it each year in order to maintain that ratio when the minimum wage goes up. Since the current minimum wage is $12, that would make the overtime threshold equivalent to $28 per hour if it were in effect today.

In order to ease the impact on businesses, L&I’s draft proposal includes a six-year phase-in period that would kick off in 2020, so businesses wouldn’t be hit with the full 2.5-times-the-minimum-wage threshold until 2025 or 2026.

The process is divided into two tiers — a more gradual phase-in for businesses with 50 or fewer employees and a faster one for businesses with 51 or more employees — but both tiers still end up at 2.5 times the minimum wage by 2026.

If businesses find themselves with employees below the new threshold, they’ll have a few options, Church says. They could raise those employees’ salaries to the new minimum, keep the salaries the same and pay the employees for any overtime or convert the employees to hourly positions.

They could also look into hiring more employees to divide the hours to avoid anyone working overtime.

“We realize that some businesses are going to say ‘We don’t want to’ or ‘(We) can’t afford to hire someone else,’ ” Church says, “but the question is: Is the employee who is low-paid the one who should be picking up that slack?”

L&I has scheduled a series of public hearings throughout the state during the summer — one will be held in Vancouver from 9 a.m. to noon Aug. 15 at Clark College’s Columbia Tech Center building, 18700 S.E. Mill Plain Blvd. — and will accept public comment on the draft rule change until Sept. 6.

The agency expects to adopt the final version of the rule change in late 2019, with the first threshold hike scheduled for July 1, 2020. The final version could be adjusted based on feedback from businesses, and Church says the agency expects to receive a lot of comments.

“This is the middle of the process still,” Church says.

Changes are also in the works again at the federal level. On March 7, the U.S. Department of Labor announced a new proposal to raise the federal overtime exemption standard to $679 per week, or $35,308 per year. The public comment period for that proposal ended in May, and the draft is still under review.

Businesses concerned

L&I estimates the first threshold hike has the potential to affect 77,000 salaried employees throughout Washington, and the final hike in 2026 stands to bring that total to 252,000. The Washington Employment Security Department estimated the state’s total labor force — including all salaried and hourly workers — to be about 3.9 million, according to its latest labor market report.

L&I’s numbers aren’t broken down by county, so there’s no definitive estimate for how many Clark County workers would be impacted. The labor market report pegs the county’s labor force at roughly 236,000 — about 6 percent of the state’s total — but that doesn’t necessarily mean Clark County has 6 percent of the 77,000 workers in L&I’s statewide estimate.

Statewide, businesses have reacted with alarm to the proposed threshold hike. In a statement released in June, the Association of Washington Businesses acknowledged that the threshold needed to be updated, but argued that Washington should wait for the federal government to update its rules first and then tailor the state’s rules to match.

“Requiring employers to pay salaried workers at least $79,872 per year by the time this rule is fully implemented and linking future pay increases to the state minimum wage is an astonishing increase over the current overtime rule and will likely catch many small businesses and nonprofits by surprise,” association President Kris Johnson said in the statement.

Straining employers

In Clark County, one of those nonprofits, the Boys & Girls Clubs of Southwest Washington, is eyeing the proposed changes apprehensively. Executive director Francisco Bueno says nonprofits face a particular challenge when trying to absorb the costs.

“We can’t just raise prices,” he says. “That’s not what we’re about. We’re about serving those that need us most.”

Bueno says he’s been talking with his team members to figure out their options for how to adjust to the changes, and says the group has been treating the salary threshold and minimum wage increases as one combined problem to work through.

The nonprofit wants employees to be paid fairly, he says, but the big concern for the Boys & Girls Clubs and other nonprofits is the speed of the changes. The ultimate answer to the question of how to absorb the costs is probably to bring in more money through fundraising, he says, but those sorts of campaigns take time to build — likely more time than the agencies will have to implement the proposed rule change.

“It’s a tricky place to be in on our end,” he says. “If they pass as planned, I can picture the changes having an immediate effect on service levels for many nonprofits.”

Several other Clark County businesses and organizations including Burgerville, Banfield Pet Hospital, PeaceHealth and the Greater Vancouver Chamber of Commerce declined to comment, noting that the rules are still in draft form, but most indicated that they were monitoring the draft review process.

Amy Robinson, an employment attorney at Miller Nash Graham & Dunn in Vancouver who previously served as the president of the Southwest Washington chapter of the Society of Human Resources Management, says the threshold hike will hit businesses across the state, but the impact could be more painful in rural counties where salaries and living costs are lower, since they’ll all be tied to the same statewide minimum wage.

There’s another potential impact for Clark County, she says: proximity to Oregon. Oregon’s salary threshold is already tied to the minimum wage, but the multiplication factor is much smaller than the one proposed by L&I for Washington. In the Portland metro area, for example, the minimum wage rose to $12.50 on July 1, which pushed the salary threshold up to $26,000.

Clark County has been able to attract a number of new technology startups in recent years and even lure away a few Portland companies by offering a way for employers to benefit from Washington’s tax structure while still being in the Portland region. But future business newcomers would have to factor in the salary thresholds when picking their preferred side of the Columbia River.

“They can’t not,” Robinson says. “They’re going to need to be thoughtful about how that impacts their operations and plan accordingly.”

Regulatory uncertainty is another big concern for businesses, Robinson says, not just for Clark County but statewide, and the proposed threshold hike creates uncertainty in several ways.

First, it’s the latest in a string of major state labor law changes that businesses have had to absorb in a short time. Second, the state’s threshold review process is happening alongside the federal government’s review of its own proposed hike.

That federal hike is the second in four years, she notes — the 2016 proposal was just weeks away from going into effect when the court enjoined it, and businesses nationwide had already gone through most of the motions to prepare for a change that never came.

Now Washington businesses are facing a repeat of that process, only with two different new standards and no way to know for sure if either or both will be implemented this time.

“The amount of changes that a business in Washington is going through in the past five years has been exponential,” she says.

A third big source of uncertainty is that the proposed new rule ties the threshold to Washington’s minimum wage, which in turn will be tied to the Consumer Price Index, making it impossible to project the exact changes.

“We know next year (the minimum wage) will be $13.50 — that’s the only number we have locked in,” she says.

Ultimately, Robinson says most of the business owners she’s talked to understand that some sort of update is inevitable, and she says the human resources community has been anticipating a change for most of the past decade. The concerns are more about the scale and timing of L&I’s proposal, as employers grapple with the possibility of an across-the-board change that more than triples the threshold for everyone in just a few years.

In this series

• L&I proposal would drastically change state’s overtime rules; Proposed increase in pay threshold for salaried workers creates concern, confusion for businesses, nonprofits

• State tightens up on rules for noncompete agreements; Employee must meet certain criteria for policy to apply

She said, “$23,660 is a pretty low threshold in today’s workplace, but whether it’s double that or increasing by a two-thirds amount, it’s tough to say where the right break is. And the threshold doesn’t currently account for business sizes and other factors.”

Columbian business reporter