Washington employers should prepare for historically high increases in minimum wage, exempt-salary requirements…
(Susan Eberle Stahlfeld, Partner and David E. Worley, Associate, Miller Nash LLP)
As all Washington employers know, Washington employees who are nonexempt (e.g., not salaried) must be paid an hourly minimum wage. Additionally, Washington establishes minimum salaries for exempt (i.e., salaried) employees, which tracks the minimum wage.
As all Washington employers also know, Washington’s minimum wage is indexed to inflation and goes up every January 1. Given the high rate of inflation this year, Washington employers should anticipate significant increases in both the state minimum wage and exempt salary requirements, effective January 1, 2023. Employers with Seattle/SeaTac hourly employees will likely see even more substantial increases for those employees.
The Washington Minimum Wage Act (MWA) RCW 49.46, sets the minimum hourly wage all nonexempt employees must be paid in the state of Washington, presently $14.49/hour. Seattle and SeaTac have local ordinances establishing higher minimum wages within those municipalities, of $17.27 and $17.54/hour respectively for 2022.
The MWA requires that the state minimum wage be adjusted annually “to maintain employee purchasing power.” Seattle and SeaTac similarly adjust their minimum wages each year for inflation. This is accomplished by increasing the minimum wages to track inflation, based on the Consumer Price Index for urban wage earners, or CPI-W. For the state, the analysis examines the change in the CPI-W from August of one year to the next August to determine the required change to the minimum wage. An annual adjustment is mandatory based on this analysis.
While the inflation figures for the state analysis obviously are not final for this year (we do not have the CPI-W increases for June – August yet), most are aware that the U.S. has experienced ominously high inflation in the past several months, and the CPI-W has seen a record rise as well. From August 2021, to May, 2022, the CPI-W has already risen 7.3%, and is trending upward. Inflation for the previous twelve months as of the time of this writing sits at approximately 8.6%.
If the final inflation rate for the full period matches the current inflation rate of 8.6%, the state minimum wage would increase from $14.49 to $15.74/hour. Seattle and SeaTac minimum wages could increase from $17.27 to $18.75/hour for Seattle, and from $17.54 to $19.05/hour for SeaTac hospitality and transportation employees. These projected rates are only estimates based on current data; the final numbers could be lower or higher, depending on what happens with inflation between now and August. Service/retail employers are already facing labor shortages, supply chain issues, decreased patronage due to the lingering effects of the pandemic, and slowing consumer spending. These increased labor costs will likely further strain employers, with the very real possibility that increased wages result in higher prices to consumers, closed businesses, layoffs, and fewer employees stretched thin.
Other factors to consider:
Nonexempt employees working more than 40 hours in a workweek will also be entitled to overtime at 1.5x the employee’s regular rate of pay. Whatever the ultimate increase in the minimum wage, it will also result in significantly increased overtime costs.
Exempt Salary Thresholds
Washington law sets minimum salary thresholds for exempt employees. In addition to the annual inflation increases, the state is currently phasing in general increases until 2028, when for all employers the salary level to be exempt will be 2.5x the minimum wage for 40 hours a week.
For 2022, both small and large employers have the same exempt salary threshold of $1,014.30 per week. For 2023, smaller employers (0-50 Washington employees) will see only an inflation increase in the exempt salary threshold. If that increase is 8.6% as projected, the new salary threshold for small employers will exceed $1,100 per week (over $57,000 annually).
Larger employers (51+ Washington employees) will see both an inflation increase and a phase-in adjustment. For 2022, the formula is 1.75x the minimum wage for 40 hours. In 2023, however, the formula for large employers will be 2.00x the minimum wage for 40 hours. If the inflation increase is 8.6% as projected, the new exempt salary threshold for large employers will exceed $1,250 per week (over $65,000 annually).
Given present inflation rates, by the time the new exempt salary structure is phased-in fully in 2028, the minimum salary threshold may exceed $90-95,000, or $5,000-$10,000 higher than the most recent prediction by the Department of Labor & Industries. As a reminder, the salary by itself must meet the required thresholds, even if the employee receives other compensation besides the salary.
How to Prepare
Employers should anticipate and plan for these increases in labor costs in financial planning. Employers should also anticipate that these increases will not only affect the pay of those earning the minimum, but will also likely require increased pay to those earning $20-25/hour who have increased or supervisory duties. Likewise, there may be employees currently treated as exempt whose salary is significantly lower than the projected 2023 levels; employers will need to decide whether to convert those employees to hourly nonexempt employees or increase their salary.
Employers should also consider a full examination of their pay practices for all employees to ensure compliance with state and local laws. In some cases, the cost of underpayment of an employee may be a small fraction of the penalties the employer must pay, including attorney’s fees, for relatively minor mistakes.