Overtime Pay Requirements Change Dramatically in 2024!!!!

Don’t Overlook this Important New Washington State Compliance Requirement!

On January 1, 2024 the new benchmark for the pay level that must be met in order for an otherwise eligible employee to be considered exempt from overtime pay requirements increased to $1302.40/week or $67,72480 a year.  This increase will present a unique challenge for small to medium sized Washington employers since it is a $12,000/year increase over the 2023 benchmark and a 20% increase in the pay level required to avoid an overtime pay requirement for any employee, regardless of other eligibility factors.

Our guess is that some of our readers are going to be caught off guard by this change and its potential impact on so many facets of employer pay plans.  Given that the eligibility threshold cannot consider bonuses or commissions in the calculation of pay,  we know that many small to medium sized employers will be faced with decisions about how to deal with highly valued employees in sales, service, operational or administrative roles, whose base pay falls below the new exempt pay threshold.

And yes -get ready for it – this exempt pay threshold will increase each year because it is directly linked to Washington’s minimum wage, one of the highest minimum wages in the nation.  The minimum pay threshold to be considered exempt will be close to $93,000 by 2028 when it stabilizes at a rate of 2.5 times the state’s minimum wage.

We anticipate that due to this threshold change…

  • Many small to medium sized Washington employers will be taking a second look at their pay and benefit models and how they classify employees inside those models.
  • A large number of Washington employees will become newly subject to overtime pay requirements.

This blog has been written to make sure our readers are aware of these changes in exempt status pay requirements and are prepared to manage that change both in the short and long term.  Your writer is neither an attorney or a specialist in compensation and relied exclusively on rules published by the  Washington State Department of Labor  and a related Q and A as source documents for the following content. We encourage our readers to affirm the accuracy of the following content with their appropriate advisors.    

Your Short Term Options

Here’s the down and dirty re: what Washington employers need to have in place in 2024 to stay in compliance with Washington State law.  If you are currently paying an employee a rate of base pay (either salaried or hourly, full or part time) that does not meet the minimum pay requirement to be considered exempt, you have at least four options to remain in compliance.  As editorial comment, we find none of these options particularly appealing but this is what we’ve come up with to date.  You can…

# 1  Increase the employee’s rate of pay to meet the salaried exempt requirement.  This could result in pay increases of  20% for employees who were in compliance in 2023 but will not be in 2024.

#2  Keep the employee in their salaried role (and at the same rate of pay), but re classify them as salaried non exempt, subject to overtime pay requirements.  Even though you will be paying these employees on a salaried basis, you will now need to find a way to track their hours of work in order to identify hours worked over 40.

#3  Keep the employees’ rate of pay as is, but convert the employee from a salaried to an hourly pay plan.  This may or may not be your easiest option depending on what policies you have in place that applies different policies and benefits to employees depending on whether you pay them on a salaried or hourly basis.

#4  Add all pay normally considered variable (bonuses, commissions, etc.) into the employee’s current base pay in order for that base pay to meet the exempt benchmark.

Option 1 is likely the most expensive of the 4 options and will have significant impact on current pay plans.  It is also the simplest to execute – administratively

Option 2 has its share of administrative complications but perhaps even more importantly it is the most difficult option to explain to impacted employees.

Option 3 is the simplest to execute of the 3 options but has the potential to be the most disruptive to your overall approach to compensation depending on how you have organized the pay and benefit policies differently for hourly and salaried employees.  We have found that for many employees an hourly pay status is not positively perceived, reflecting what many employees consider a negative value assigned to an employee paid hourly.

Option 4 is obviously not available to all employers but for those who have the ability to add anticipated bonuses and commissions into an employee’s base pay, that move will have significant impact on how they manage employer risk, company profitability, and employee motivation.

Keep in mind that options 2 and 3 will require you to track the impacted employees hours of work, another organizational adjustment that has its own share of disruption.

The Catch 22 – How Overtime Pay is Calculated for Salaried Non Exempt Employees Has Its Own Wake!

While the requirement to calculate and pay the overtime (time and a half) pay rate for a non exempt employee might seem like a straight forward requirement, administratively it is  anything but.   And for employees who might expect premium pay for hours over 40, if they continue to be paid on a salaried basis, the increased dollars in their pocket are likely not going to be what they expected.

Here’s the deal.  For an employee to be treated as a salaried employee (as opposed to an hourly employee) their employer must agree to pay them a certain dollar amount each week, regardless of how many hours they actually work.  This means that the employee’s actual rate of pay, converted to an hourly calculation, will vary depending on how many hours they work during the week, divided into the total amount of pay they earn that same week (to include bonuses, commissions, tips, or shift/role differentials) all depending on the employee’s pay plan.

Here’s how these “rules” play out in determining overtime pay for a salaried exempt employee, calculated as follows:    

  1. Add all earnings for the time.  Base pay, bonuses, commissions, etc.                                                               Example: $1000 plus a $200 bonus = $1200/week
  2. Divide these earnings by the total hours worked in that week to determine actual pay rate.                     Example: $1200 divided by 45 = $26.67
  3. Multiply this hourly rate by .5 to arrive at overtime pay rate                                                                              Example: $26.67 times .5 = $13.34.
  4. Multiple the overtime pay rate by the number of hours worked over 40 to arrive at overtime pay           Example: $13.34 * 5 = $66.65
  5. Add overtime pay to regular pay to calculate total pay                                                                                             Example:  $1200+ $66.65 = $1266.65

In case you’re wondering why the overtime pay rate is calculated as .5 of the employees hourly pay rate instead of the 1.5 multiplier – you need to remember that the  employee has already been paid their regular pay rate for all hours of work (including hours over 40)  as part of their guaranteed salary, i.e. their weekly pay.   This means that when calculating the overtime pay requirement you only have to cover the .5 component of the overtime rate.

We anticipate this calculation will need to be explained more than once to avoid misunderstandings and build trust in new pay plans.    

The Long Term – What Should We Be Thinking About?

And again, let me remind our readers that  I am neither an attorney, a comp  or payroll specialist.  What I am is a small business owner who will be facing the same challenges as many of our readers when faced with these exempt status changes.  Each company will have their own set of issues regarding this change ranging from no to significant impact.  Here’s the action items our our plate as we move from the short term fixes to a longer term business strategy.

We obviously have to take a close look at our current employee classification models.  What jobs do we want to pay on an hourly basis?  What jobs do we we want to retain on a salaried basis?  What adjustments do we want to make in the PTO benefit plans attached to each.

We need to anticipate changes in compensation packages that might impact the local marketplace.  What do we think will happen to the prevailing wage in the local market that might have a trickle down effect on recruiting?  The DoL website seems to suggest that employers simply need to increase rates of pay for all salaried employees to stay in compliance.  Easier said than done.

Once we finalize the changes we want to make, we need to create a messaging strategy – making sure we continue to message the value we place on all our employees irrespective of their pay plans, whether or not they are exempt or nonexempt.

We need to take a close look at the fixed and variable elements of all pay plans – how much of an employee’s pay do we want be represented in a fixed commitment, how much should be available on a variable (performance based) format? What adjustments in base pay can we make without completely disrupting existing profitability  models?  Do we need to hire fewer employees, pay each  employee more?

How will we manage the financial consequences of required overtime pay? Do we want to encourage or discourage either/or our hourly or salaried employees to use overtime?  Do we want to hire fewer employees and pay each more by giving them access to overtime ?  Or shall we hire more employees, with fewer opportunities for overtime?

What policies will we need to establish and manage to our “preferred” work model?  Because the nature of our work allows for a great deal of flexibility in how an employee gets work done, we will need to decide how to treat a non exempt employee who we suspect will want to work more than 40 hours a week because they want to go above and beyond normal work expectations?  Should we make it a violation of company policy for a salaried non exempt employee to work more than 40 hours a week without pre approval? If yes, how will we manage that policy – particularly for our remote employees?

I suspect your head is spinning just like ours – with more questions than answers. Throughout the year we will be paying attention to the changes in pay plans we can identify as trends, particularly those used by small to medium sized employers. We will be sharing what we learn others are doing throughout the year. Stay tuned!

PACE Staffing Network is one of the Puget Sound’s premier staffing /recruiting agencies and has been helping Northwest employers find and hire employees based on the “right fit” for over 45 years.

A 5-time winner of the coveted “Best in Staffing” designation , PACE is ranked in the top 2% of staffing agencies nationwide based on annual surveys of customer satisfaction.

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