Washington’s L&I releases formal proposal to revise overtime employment rules

To:                   Chief Executive Officers, Legal Counsel, Human Resources and Government Affairs staff

From:              Jaclyn Greenberg, Policy Director, Legal Affairs  |  jaclyng@wsha.org |  (206) 216-2506

Subject:         Washington’s L&I releases formal proposal to revise overtime employment rules

Purpose

The purpose of this bulletin is to advise members of rulemaking about overtime pay eligibility by Washington State’s Department of Labor and Industries (L&I). The rulemaking represents a significant change in how employees are classified for purposes of overtime pay eligibility. This bulletin outlines the proposed changes, ways for your hospital to participate in the rulemaking and WSHA’s activity with this rulemaking.

L&I has released its formal proposal to update the regulations governing Executive, Administrative and Professional (EAP) workers, also known as exempt employees. Unless exempt, employees must receive overtime pay and other benefits under the state’s minimum wage statute. The proposed changes would increase the number of workers who are not exempt, and are therefore eligible for overtime pay. In order to qualify for exempt status, an EAP worker must meet a salary threshold and satisfy a duties test. The proposal includes setting a salary threshold for exempt employees of nearly $80,000 (2.5 times the state minimum wage) for employers with 51 or more employees.

As discussed further below, WSHA has concerns about the proposal’s impact on hospitals, including financial stress, compliance, litigation risk and negative impact on employment relations.

Applicability

All hospitals, as employers in Washington, are subject to this rulemaking.

Recommendation

1. Review this bulletin and consider the proposed rule’s impact on your hospital, particularly the financial ramifications of introducing the proposed minimum salary threshold and the phased-in implementation schedule.

2. Contact WSHA Policy Director for Legal Affairs, Jaclyn Greenberg, at jaclyng@wsha.org with information about how the proposed rule will impact your hospital. Please provide feedback by Friday, July 12, 2019. See below for specific feedback questions.

3. Attend a public hearing on the proposed rule. L&I has set the following schedule:

Western Washington

City	Tumwater	Seattle	Bellingham
Date and Time	July 15, 2019 1pm – 4pm	July 16, 2019 9am – 12pm	July 17, 2019 9am – 12pm
Venue	L&I Headquarters 7273 Linderson Way SW Tumwater, WA 98501 Rm: S117/S118/S119	The Swedish Club 1920 Dexter Ave N, Seattle, WA 98109 Rm: Stockholm Hall	Four Points/Sheraton Bellingham Hotel & Conference Center 714 Lakeway Dr, Bellingham, WA 98229 Rm: Whatcom Room

*The first hour is for a pre-hearing overview, including explanation and discussion of the proposed rule. The following two hours are reserved for public hearing.

Eastern Washington

City	Ellensburg	Kennewick	Spokane
Date and Time	August 5, 2019 9am – 12pm	August 6, 2019 9am – 12pm	August 7, 2019 9am – 12pm
Venue	Hal Holmes Community Center 201 Ruby St, Ellensburg, WA 98926 Rm: Hal Holmes	SpringHill Suites by Marriott Kennewick 7048 W Grandridge Blvd, Kennewick, WA 99336 Rm: Vista Hall	CenterPlace Regional Event Center 2426 N Discovery Pl, Spokane Valley, WA 99216 Rm: Large Meeting Room

*The first hour is for a pre-hearing overview, including explanation and discussion of the proposed rule. The following two hours are reserved for public hearing.

4. Consider submitting a written comment by email (EAPRules@Lni.wa.gov) by September 6, 2019.

Next Steps

WSHA is actively engaged with this rulemaking process. Last fall, we commented twice with concerns on L&I’s pre-proposal draft rules (available here and here). We are considering whether and to what extent to comment on the proposed rule. As such, we request your feedback about how the proposed changes would impact your organization.

Please consider the following:

1. The financial repercussions of implementing a salary threshold of 2.5 times the state minimum wage (about $80,000 annually). What are your projections for the financial impact arising from a 2.5 times multiplier on the state minimum wage? L&I is proposing a phased-in implementation, beginning with a 1.75 multiplier effective July 1, 2020, increasing each year until 2025 for larger employers (51 or more employees). See table below for the salary level schedule. Please break out figures at different salary levels, if providing information to WSHA.
2. The size and scope of your workforce potentially impacted. Using a conservative estimate, how many staff could become non-exempt employees? Hospitals should be mindful of the rule’s application to its professional workers, in addition to those who meet the definitions of a bona fide executive or administrative employees. Under current administrative guidance, the professional worker category may capture a potentially large swath of a hospital’s workforce, depending on their job duties, including people employed in fields of nursing, accounting, actuarial computation, and various types of physical, chemical, and biological sciences, including pharmacy and registered or certified medical technology. Even if these workers are exempt according to their job duties, this proposed rule would require them to make more than the salary threshold to be considered exempt. For the administrative guidance, see here.

3. The workability of a phased-in implementation period. How likely is your organization to rely on the phased-in implementation option when restructuring employees to comply with the new rules? L&I proposes a graduated implementation, increasing the salary threshold four times between July 1, 2020 and January 1, 2025 for large employers. See table below for the salary level schedule.

Overview

Context for the current proposed changes. Since virtually all employers must comply with the Federal Labor Standards Act (FLSA) EAP rules, Washington state has not had a strong basis for updating its own EAP rules. Where differences exist between state and federal rules, employers are required to follow the regulation that is most favorable to the worker. Indeed, L&I has not meaningfully updated its EAP exemptions since 1976, including salary thresholds. However, in March 2018, L&I initiated rulemaking on the basis that the federal salary threshold failed to be raised. The Obama administration attempted to raise the FLSA salary threshold in 2016 to $970/week ($50,440/year) but that change never went into effect. Currently, the federal EAP exempt salary threshold is $455/week in earnings ($23,660 year).

In March 2019, the Federal Department of Labor issued a new proposed rule that would raise the salary threshold to $679/week ($35,308/year). It made no changes to the duties tests for EAP workers. The rules are not yet final, but it is expected that they will become effective in early 2020.

The proposed rule. The proposed rule language is available here. Three key concepts and considerations are as follows.

1. The proposed rule would create a “salary test” of 2.5 times the state minimum wage. Under state and federal EAP rules, an employee needs to satisfy a duties test and meet a salary threshold to qualify for exempt status. Under the proposed rule, the salary threshold will be tied to the state minimum wage. It will rise as the minimum wage rises. Ultimately, the salary threshold will be 2.5 times the state minimum wage. When that salary threshold goes into effect on January 1, 2025, it will mean an EAP worker may only be exempt if he or she makes more than $78,156.

The current salary thresholds are as follows:

Overtime exemption threshold	Weekly	Annual
Federal	$455	$23,660
Washington State	$250	$13,000

Washington state’s minimum wage for 2019 is $12.00. Starting January 2020, the state minimum wage will be $13.50. Starting January 2021, minimum wage increases will be calculated by L&I using a formula tied to the rate of inflation (based on the CPI-W). For more information, see here.

2. The rule’s implementation would be phased in over 5 years. L&I is proposing to phase in the 2.5 multiplier over 5 years, for larger employers as follows:

Effective date	Multiplier	MW weekly rate	Salary threshold
July 1, 2020	1.75 x	$945	$49,140
January 1, 2021	2 x	$1103	$57,356
January 1, 2022	2.25 x	$1268	$65,936
January 1, 2023	2.25 x	$1296	$67,392
January 1, 2024	2.25 x	$1324	$68,848
January 1, 2025	2.5 x	$1503	$78,156
January 1, 2025	2.5x	$1536	$79,872

*The above information is for larger employers (51+ employees), which covers all WSHA member hospitals and health systems. For information on the phase-in implementation schedule for smaller employers (< 50 employees), see L&I’s Factsheet on the overtime rules here.

3. Salary threshold aside, the rule’s alignment with federal EAP standards remains to be determined. According to L&I, its proposed changes to the EAP duties tests will better align with the federal EAP duties tests but they are not identical. L&I has described the two sets of duties tests as similar but not the same. Employers must follow the standards most favorable to the employee including both the salary threshold and duties tests. There may be compliance issues associated with the differences in the duties tests. It is not clear how the state’s proposed rules differ from the federal standards. L&I has indicated it will release an analysis outlining the differences. WSHA will update this bulletin when that information becomes available.

Potential Impact. WSHA has concerns about the proposed rule, including:

• Financial stress, owing to increased overtime pay obligations and/or increased salary obligations;
• Negative impact on employment relations, owing to exempt employees automatically becoming non-exempt based on the salary threshold alone;
• Increased litigation risk, if employees and employers interpret the EAP exemption changes differently; and,
• Compliance issues, owing to whatever variation may exist between L&I’s duties tests and the federal EAP duties tests.

One concern worth reiterating from our comments on the draft language (available here and here) is the creation of mechanistic criteria such as a salary test to determine whether an employee is a bona fide administrative, executive or professional worker. This could have unintended and counter-productive consequences, including forcing these employees into narrower work parameters notwithstanding the actual duties and responsibilities of their jobs; reducing employee autonomy and flexibility; limiting career opportunities and advancement due to the high salary threshold; and reducing rather than raising benefit offerings.

Background and References

L&I Proposed Changes – Washington’s Overtime Rules – Factsheet
L&I Proposed Overtime Rules FAQ
L&I Administrative Guidance – Exemption from overtime requirements for professional workers
L&I Overtime Rules – Proposed Rule language
RCW 49.46
WAC 296-12