Washington Just Erased Its Small Business Discount on Overtime Rules

If you run a small business in Washington State with salaried employees, a quiet but expensive change took effect on January 1, 2026: the lower overtime-exempt salary threshold that small employers used to get has been eliminated. Every employer in the state, regardless of size, now has to pay exempt employees at least $80,168.40 a year to keep them off the overtime clock. For a business with 5 or 15 employees, that's a very different number than it was twelve months ago.

What Changed, in Plain Numbers

Washington calculates its exempt salary threshold as a multiple of the state minimum wage, and that multiple has been climbing every year. As of January 1, 2026, the threshold is set at 2.25 times the state minimum wage — $80,168.40 a year, or $1,541.70 a week.

The part that hits small businesses specifically: until this year, small employers (defined as those with 1 to 50 employees) had a separate, lower threshold than large employers (51 or more employees). In 2025, that gap was significant — $69,305.60 a year for small employers versus $77,968.80 for large ones. As of this year, that distinction is gone entirely. Every employer, big or small, now has to clear the same $80,168.40 bar to classify a worker as exempt from overtime.

And the number isn't done climbing. The threshold is scheduled to keep rising each year through 2028, when it reaches 2.5 times the minimum wage — putting Washington's exempt salary floor on track to be the highest of any state in the country, edging toward roughly $93,000 a year.

Why This Catches Small Employers Off Guard

A manager, office administrator, or shift supervisor who was legitimately exempt from overtime under last year's small-business threshold may no longer qualify this year — not because their job changed, but because the dollar bar moved out from under them. If you haven't checked every exempt employee's salary against the new $80,168.40 figure since January, there's a real chance you have someone misclassified right now.

This isn't just a duties-test question. Meeting the job-duties requirements for an exemption (supervisory responsibility, discretion, and so on) is necessary but no longer sufficient — an employee also has to clear the salary bar, full stop. An employee doing genuinely exempt-level work but earning $72,000 a year is, under this year's rule, entitled to overtime pay for any hours worked over 40 in a week.

What It Costs If You Miss It

Misclassification isn't a paperwork issue you can quietly fix later — it creates back-pay exposure. If an employee should have been reclassified as non-exempt in January and instead worked unpaid overtime for months, the business owes that overtime retroactively, and Washington's wage-and-hour enforcement doesn't require the employee to prove they complained first.

Before this becomes a bigger problem, it's worth running a real audit of your profit and loss statement against your current payroll classifications — specifically, cross-checking every salaried employee's annual pay against $80,168.40. For employees who fall short, you have two real options: raise their salary to meet the threshold, or reclassify them as non-exempt and start tracking and paying overtime for hours over 40 per week.

Getting Classification Right

This is also a good moment to double check that everyone you're treating as a salaried employee is actually an employee in the legal sense, and not someone who should be structured as a contractor — or vice versa. The rules governing exempt salary thresholds only apply to W-2 employees; they have no bearing on properly classified independent contractors. If you have any ambiguity in how a worker is set up, it's worth reviewing the distinction between an independent contractor and an employee before this audit, since fixing classification in the wrong direction creates a separate set of problems.

Steps to Take Now

• Pull a list of every exempt employee and check their current annual salary against $80,168.40.
• For anyone below the threshold, decide whether to raise their pay to stay exempt or reclassify them as non-exempt and start tracking hours.
• If you reclassify someone, put a time-tracking system in place immediately — retroactive overtime disputes are far more expensive to untangle than getting it right from day one.
• Budget for 2027 and 2028 now. The threshold rises again before it plateaus at 2.5 times minimum wage, so this isn't a one-time adjustment.
• Document your decisions. If the Department of Labor & Industries ever audits your classifications, having a dated record of when and why you made each call matters.

Why Washington Did This

The state has been phasing out the small-employer discount for several years as part of a broader plan to bring its overtime rules in line with its rapidly rising minimum wage, rather than let the exempt threshold lag behind. For small business owners, the practical effect is that the compliance advantage of being "small" under this particular rule has now fully disappeared — a status that mattered a great deal as recently as December 2025 and means nothing as of this year.

The businesses most exposed here are ones that set exempt classifications years ago and haven't revisited them since. A five-minute payroll check now is a lot cheaper than a back-pay claim later.

Photo by Wesley Tingey on Unsplash