Feds, state working overtime on exemption rules

Final rule at state level expected in early December, federal in effect Jan. 1

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For the second time in three years, the U.S. Department of Labor is close to imposing new federal regulations on exempt salaried employees. The new rule will increase the minimum salary threshold for those workers exempt from minimum wage and overtime under the executive, administrative and professional (EAP) exemptions. The changes will go into effect on Jan. 1, 2020, and would be the first time in 15 years the threshold was raised at the federal level.

The minimum salary threshold to trigger exempt status will increase from $455 per week to $684 per week. The rule also increases the salary threshold for the highly compensated employee from the currently enforced level of $100,000 per year to $107,432 per year.

In addition, the new rule allows employers to use nondiscretionary bonuses and incentive payments (including commissions) paid at least annually to satisfy up to 10% of the standard salary level. The Department of Labor says this part of the rule is in “recognition of evolving pay practices,” pointing to the trend of performance-based compensation. There is also a revision in the special salary levels for workers in U.S. territories and the motion picture industry.

The regulations issued under the Fair Labor Standards Act (which evolved minimum wage, maximum work weeks and has its roots in upending child labor) will allow 1.3 million workers nationwide access to overtime pay.

The Washington Department of Labor and Industries is fast on the federal government’s heels, expected to propose a new rule under state law that will supersede the federal guidelines and significantly increase the threshold for companies with more than 50 employees, which will face as much as a $49,140 minimum threshold. If implemented the new state standards will increase over several years, beginning on July 1, 2020.

‘We’ve been here before’

In 2016, the federal government attempted to update the salary thresholds and raise them quickly to much higher levels than this month’s proposed final rule. The weekly threshold for standard exempt employees was planned to be $933 – more than double what it is now and has been since 2014.

“Employers are going to feel like we’ve been here before. This started to happen in 2016, and at the very last minute a court decision came down stopping the whole thing,” said Amy Robinson, senior counsel in Miller Nash Graham and Dunn’s Vancouver office. Robinson is a certified Senior Professional in Human Resources (SPHR) and a SHRM Senior Certified Professional (SCP) and has a combined 25 years of experience in human resources and law. “There was a lot of panic.”

On the bright side, many of Robinson’s clients are ready for this increase because they did the work back then, she said, which included deciding whether to increase exempt employees to the new salary level or convert them to nonexempt employees. There is some perceived clout associated with exempt status, and certainly flexibility and other benefits often go along with an exempt status. In determining whether to change a position’s status, the employer has to weigh whether that position will “retain and attract the same talent,” said Robinson, adding that instead of changing classifications, employers may need to ask “what do we need to do to keep this an exempt position.”

According to the Department of Labor, “for an employer to claim an exemption for a particular employee, three tests generally need to be satisfied: (1) Payment on a salary basis: The employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed; (2) Payment of a minimum salary level: The amount of salary paid must meet a specified minimum amount; and (3) A duties test: The employee’s job duties must primarily involve those associated with exempt executive, administrative, professional, outside sales or computer employees.”

Robinson said the duties test presents opportunity for meaningful change, and that more work could be done at the federal level around clarifying the duties for exempt employees, rather than increasing salary thresholds to redefine the exempt classification.

“The duties test is complex, and political pressures are at play around updates. Washington (L&I) is proposing some fairly aggressive changes to the test,” said Robinson.

Although the FSLA only applies to those companies engaged in interstate commerce, today with the internet, nearly every single business is engaged in interstate commerce – certainly more than in 2004. And in a border region like Southwest Washington, even more businesses are affected by the federal rule.

“For us here in Clark County almost everyone will be affected,” said Robinson

But overall, she said, “Things need to change – we need predictability and more notice,” adding, “This will all go into effect Jan. 1, and businesses have the next ten weeks to figure out those choices and get it right.”

Short on time

In apparent response to this kind of criticism over the 2016 kerfuffle, USDOL said in a September fact sheet published on the matter, “Experience has shown that fixed earning thresholds become substantially less effective over time. Additionally, lengthy delays between updates necessitate disruptively large increases when overdue updates finally occur. Accordingly, in the final rule the Department reaffirms its intent to update the earnings thresholds more regularly in the future through notice-and-comment rulemaking.”

Washington Department of Labor and Industries proposed its new state rule in June and took public comment through Sept. 20, extending its comment period by two weeks due to the avalanche of comments – 2,266 in all – according to L&I. An estimated 625 people attended and more than 180 people testified at one of seven public hearings held around the state over the summer, including 50 people at an Aug. 15 meeting in Vancouver. The state has not updated its overtime rules since 1976, and similar concerns about implementation speed are at play locally.

John McDonagh, president of the Greater Vancouver Chamber of Commerce, spoke at that meeting and issued a statement on behalf of the chamber, drawing on responses from a poll Chamber members participated in on the matter.

He said, in part, “we encourage the Department to reconsider both the speed with which the rule would take full effect – it doesn’t seem to be responsible to try and correct over 40 years of inattention to the rule in only six years; likewise we encourage the department to look again at the levels under which employees would be considered hourly.”

“As for preparing our members, we communicated frequently with them during the open comment period with L&I and now (we’re) just waiting for their final rules so we can get that out and help them with compliance,” McDonagh said.

A statement from L&I explains the proposed rule, which will be tied to the state minimum wage: “Increases would be phased in over several years depending on the size of the employer. In the rule proposed in June, to meet the requirements, employers with 50 or fewer employees would have to pay exempt workers approximately $675 a week (lower than the proposed new federal standard) or about $35,000 per year, beginning July 1, 2020. Larger companies would have to pay exempt workers approximately $945 a week, or about $49,000 per year (much higher than the federal standard). Those amounts would increase yearly based on a formula that uses the state’s minimum wage. The changes could impact more than 250,000 workers by 2026. At that time, exempt salaried workers would have to be paid at least 2.5 times minimum wage and meet the job duties test.”

Because the new federal threshold is higher than what the state has proposed for employers, small employers would have meet the higher federal threshold. In other words, when companies are navigating the new state and federal rules, they will have to comply with whichever is more favorable to employees.

The proposed rule would also change the method used in Washington to determine if an employee is doing work that allows them to be classified as exempt. The state currently uses two “duties tests” to make this determination. Under the proposal, they’d be combined into one test making the process simpler for employers and increasing the likelihood that workers are correctly classified, according to L&I.

Voices on both sides

Building Industry Association of Clark County, Vesta Hospitality, Southwest Washington Labor Council, Washington Hospitality Association and a total of 15 organizations and companies were represented at the meeting on both sides of the issue. BIA was concerned with a pay gap for higher paid employees and flexibility for seasonal employees, while union members expressed appreciation for updated rule.

Ethan Shutt, representing SEIU 775, a union that represents more than 45,000 caregivers in Washington, spoke first, saying in part, “Thank you for recognizing the needs of low-income salaried employees and restoring workers’ ability to have lives outside of work.”

A final decision and proposed rule is expected in early December.

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