If you run a business and have employees earning a salary rather than an hourly wage, pay attention — things are about to change at the federal level, and could get even more complicated here in Oregon.
There have been efforts in recent years to significantly increase the threshold by which an employee could start earning overtime pay. Last month, the U.S. Department of Labor’s Wage and Hour Division announced its final rule, raising the overtime-exempt salary threshold for executive, administrative, and professional (EAP) employees from $23,660 to $35,568 annually (or from $455 to $684 per week.)
This means that starting on January 1, 2020, you cannot have an employee on salary earning less than $35,568 per year, regardless of the employee’s job title or duties. Those employees will have to start being paid by the hour.
How did we get here? Under the federal Fair Labor Standards Act, employers must generally pay employees no less than the minimum wage (in Oregon we have a three-tiered system for determining minimum wage) and if they work more than 40 hours in one week, they must be paid 150% of their regular hourly wage for each hour above 40 hours, commonly known as time-and-a-half.
Here’s where the EAP exemption comes into play. Employees working in a bona fide executive, administrative, or professional capacity are exempt from overtime pay, so long as they earn a salary above a threshold set by the U.S. Department of Labor (DOL).
Prior to last month, that salary threshold was $23,660 per year. For a brief time, however, it looked like the threshold was going to be increased to $47,476. In 2015, labor advocates were frustrated with a threshold that hadn’t increased in more than 10 years (last increased by President Bush’s DOL in 2004) and found a friend in the then-current administration. President Obama’s DOL proposed the $47,476 figure, more than doubling the threshold at the time.
Several states and business groups responded immediately with legal action, including NFIB. Just days before the Obama rule was set to take effect on December 1, 2016, the courts issued an injunction that stopped the rule from taking effect.
Why oppose the rule? For several important reasons: obviously a significant number of small businesses would have likely had employees newly eligible for time-and-a-half overtime pay. Since businesses cannot magically increase their revenues to justify pay increases (we’d love it if we could), employers would have been left with no good options. They could limit employees to 40 hours per week and avoid paying overtime, but managers moved from their salaried positions to hourly jobs and kept under or at 40 hours per week will lose many job perks. These workers would view the change as a demotion.
They could hire additional workers to offset the reduction in hours from formerly salaried
employees, but this may also result in reducing base pay for all hourly workers so that base pay plus overtime pay would not exceed, or would remain close to, the employer’s previous overall labor costs. This would be another significant hit to worker morale.
Fast forward to today, it appears that President Trump’s DOL agreed that the overtime-exempt salary threshold should be raised, but that $47,476 was too much. It settled at $35,568, splitting the difference down to the dollar.
Meanwhile in Oregon, legislation was introduced during the 2019 legislative session that went even further than what was being proposed by the Obama administration just a few short years ago, proposing an overtime threshold of two times the state minimum wage.
If adopted during next year’s short session, the salary threshold in the Portland-metro region would jump to $52,000 immediately. By the time our minimum wage schedule is fully phased-in by July 1, 2022, the thresholds would be $52,000 in rural parts of the state, $56,160 for areas subject to the standard minimum wage rate, and $61,360 for the Portland-metro region, adjusted annually thereafter based on the Consumer Price Index.
Now you might be thinking that these figures are not realistic – that moving from a $23,660 federal threshold to $35,568 is already a significant increase and that numbers like $61,360 just couldn’t possibly be a real threat.
Unfortunately, you would be wrong. The state of Washington’s Department of Labor & Industries is currently proposing a threshold of nearly $80,000 starting in 2026. When has Oregon ever sat back and allowed one of our neighboring states to out-do us?