Exempt employees are not entitled to receive overtime.  Employers need to be aware of changes at both the state and federal level regarding exempt employees.  To be exempt, an employee must meet a three part test: (1) the salary basis test – 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) the salary level test – the amount of salary paid must meet the minimum specified amount; and (3) the job duties test – the employee’s job duties must primarily involve executive, administrative, or professional duties as defined by the regulations.  There are two relevant updates to overtime exemption rules – the first change is to federal law and the second is to Washington State law, each of which are discussed below.

Updates to Federal Law and Regulations

On September 24, 2019, the U.S. Department of Labor announced a final rule updating employees’ eligibility for overtime pay. The final rule updates the earnings threshold for exempt employees as follows:

  1. Increases the “standard salary level” from the current threshold of $455 per week ($23,660 per year) to $684 per week ($35,568 per year) for full-year workers;
  2. Increases the total annual compensation level for “highly compensated employees” from the currently enforced level of $100,000 to $107,432 per year;
  3. Allows employers to use non-discretionary bonuses and incentive payments (including commissions) that are paid at least annually to satisfy up to 10 percent of the standard salary level, in recognition of evolving pay practices.

The final rule is effective January 1, 2020

Washington State uses the threshold test that is most favorable to the employee, i.e. the one that makes it more difficult for an employee to be classified as exempt.  Because Washington State’s threshold will be lower than the federal threshold for 2020, Washington employers will need to comply with the federal standard starting January 1, 2020. This will change when Washington State requirements exceed the federal standard in 2021.

Updates to Washington Regulations

The Washington State Department of Labor and Industries has new rules taking effect July 1, 2020. This will set a new minimum salary threshold and update job duties tests, both used to determine which employees can be classified as exempt from overtime and other Minimum Wage Act protections. The new state threshold will be phased in at different rates depending on the size of the employer. In eight years (i.e. 2028), the threshold will be the same for all size employers.

Beginning July 1, 2020 and running through the end of the year, the state salary threshold for all businesses will be 1.25 times the state minimum wage, $675 per week ($35,100 per year). The state’s minimum wage will rise to $13.50 per hour on January 1, 2020. As stated above, this threshold is less favorable to employees than the federal standard, so the federal threshold will apply to employees during the entire year of 2020 in Washington.

Beginning January 1, 2021, employees at small businesses (i.e. 50 employees or less) will have to earn at least 1.5 times the state minimum wage (an estimated $827 per week / $43,004 per year) to be exempt.  Employees at large businesses will have to earn at least 1.75 times the state minimum wage (an estimated $965 per week / $50,180 per year) to be exempt.  The Washington State threshold in 2021 will exceed the federal threshold, and therefore apply to employees in Washington.

Please contact Richard Davis or Matt Paxton at Chmelik, Sitkin & Davis P.S. if you have any questions about these updates.