The Effect of Proposed Changes to the Fair Labor Standards Act (FLSA) on Higher Education Carolyn Wong, Senior Consultant Hunter Salem, Associate Consultant

Copyright © 2015 by The Segal Group, Inc. All rights reserved.

What Do These Numbers Mean to You?

5 Million

$50,440

th 40

percentile 60 days 1

Today’s Discussion The Fair Labor Standards Act (FLSA) is a federal law that governs whether or not employees receive overtime pay. President Obama tasked the Department of Labor (DOL) with updating the FLSA regulations in early 2014. Proposed regulations were released in July 2015 with the primary change of raising the salary threshold that generally determines who is eligible for overtime pay. Today’s discussion will focus on: History of FLSA Comparison of Current vs. Proposed Changes Concerns About the Proposed Regulations Potential Impact of Regulations on Higher Education Preparation for Upcoming Changes

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History of FLSA*

FLSA enacted

1938

1947

Exemptions amended

1961

Hours work defined

1966

Coverage further extended based on revenue Coverage for government employees

1974

1985

Coverage extended based on revenue and type

Overtime regulations updated

1989

1996

2004

2015

Exemption for certain computer professionals Compensatory time off for local and state government employees

* Information gathered from: Mayer, G., Collins, B., & David., B.H. The Fair Labor Standards Act (FLSA): An Overview. Congressional Research Service, 2013.

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Proposed FLSA Changes Timeline*

Changes proposed to FLSA

July 6

Labor department review begins

Sept. 4

Fall 2015

Comment period ends

Changes implemented

Summer 2016

Fall 2016

Labor department review ends

Grace Period

TBD

After the DOL publishes the annual increase to the salary threshold, organizations have 60 days to comply before the new threshold becomes effective.

* Timeline indicated above is proposed and is subject to change. 4

Comparison of Current vs. Proposed Changes CURRENT (Since 2004)

PROPOSED Minimum Salary Threshold

$970/week or $50,440/year*

For exempt status, the employee’s primary duty must still be administrative, executive, professional, or related to outside sales

Job Duties Test

No changes released as of 9/30/15. However, discussion around potential change to limit amount of time exempt employees could perform nonexempt work

Exempt status at $100,000/year Must partake in office or non-manual work and perform at least one administrative or professional duty

Highly Compensated Workers (HCW) Test

Exempt status set at 90th percentile of weekly earnings No changes proposed in duties required

$455/week or $23,660/year

* Proposed threshold for 2016 set at 40th percentile of earnings for all full-time salaried workers.

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Concerns About Proposed Regulations  Salary threshold of $50,440: • Perceived as too high by both higher education and non-profit organizations • Does not account for regional differences and areas with low cost of living  Definition of salary threshold (40th percentile) does not match historic trends  60 day implementation period viewed as too short • May conflict with the institution budget planning process • Will be challenging for institutions to plan and administer changes, and balance competing priorities strategically  Effect on part-time exempt employment is unclear 6

Institutional Concerns (Sibson Survey)  Sibson asked Higher Education HR professionals what their institution was most concerned about given the updates*

Morale

17%

 Respondents overwhelmingly considered financial implications to be the most critical factor  Other concerns included managing employee reactions and administering the changes

27%

Administrative Concerns

57% Financial Cost

The costs associated with potential changes may include salary increases, additional overtime costs, etc. * Survey of 21 higher education institutions. 7

Departmental Concerns (Sibson Survey)  Survey participants varied in which areas of the institution they expected the biggest impact to occur  Nearly three-quarters of respondents were primarily concerned with Athletics, Admissions, Administrative, and Student Affairs Finance All levels Entry level/ part-time employees Research

5% 5% 7%

Student Affairs/Services

23%

9%

19%

16%

Administrative

Admissions

16% Athletics

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What kind of specific challenges do the proposed FLSA changes pose for your institution?

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Potential Impact of Regulations on Higher Education: Significant Financial Costs Large financial impact to institutions due to a combination of:  Salary increases for affected exempt employees to proposed salary level  Overtime payments to newly classified nonexempt employees  Hiring of additional staff due to financial and resource constraints  Costs associated with layoffs for certain employees  Benefit costs given reclassification of employee jobs  Salary adjustments to ensure internal equity and prevent wage compression Institutions may not be able to fully absorb costs to comply with proposed changes. Costs may be passed onto students/families in the form of higher tuition. 10

Potential Impact of Regulations on Higher Education: Low Employee Morale Employee morale may decrease given:  Perceived loss of prestige and credibility given change in exemption status (exempt to non-exempt)  Changes in job: diminished job autonomy with loss of independent discretion and decision making, less flexibility in work hours, and decreased opportunity for career development or advancement  A reduction in the amount and type of services that can be provided to students due to fiscal and resource restraints  Change in level and type of benefits (e.g., vacation, tuition reimbursement)  Reduction in merit-based compensation 11

Are your employees aware of these impending changes? How are you currently addressing or anticipate addressing their initial concerns?

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Potential Impact of Regulations on Higher Education: Modification of Administrative Processes Internal administrative processes will need to adapt to meet the demands of the proposed changes  Short 60 day window for organizations to comply with the yearly updates to FLSA changes will cause disruptions in the budget planning process. Many institutions will have already finalized their budgets before threshold increase announced  Mass reclassifications requires potential changes to the following: • Implementation of new or expansion of existing timekeeping systems to ensure effective and efficient processes to administer and ensure compliance with time and attendance • Updates to existing job description responsibilities to reflect changes in exemption status • Updates to employee benefits (vacation, tuition reimbursement, retirement match, etc.) • Changes to other compensation and benefit policies and practices 13

Potential Impact of Regulations on Higher Education: Modification of Administrative Processes continued If staffing levels are reduced, institutions will need to rethink their organization structures, redistribution of workloads, and delivery of services Institutions may face lower levels of engagement and possible retention/turnover issues if they cannot relieve salary compression or keep pay low

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Potential Impact of Regulations on Higher Education: Adjustments to Functional Area Operations

Admissions, Athletics, Development • Positions that require significant travel, irregular hours, or fluctuating seasonal demands will be affected by proposed changes (admissions counselors, athletic coaches, development officers, etc.) • Institutions will need to accurately track and capture all work hours for these positions, while balancing and controlling for overtime costs

Research • Research professional salaries, particularly those funded by grants, are typically below the proposed minimum threshold level • Institutions may see a decrease in research positions and/or grant funding as limited funds are used to increase employee salaries above threshold level • Research professionals have flexibility and autonomy in conducting their research. Reclassification and/or compensation restrictions will change their modus operandi and lead to a loss of flexibility, productivity, innovation, teaching, and discovery 15

Potential Impact of Regulations on Higher Education: Understanding of External Impact  Difficulty in making job comparisons between one institution to another, and between institutions and for-profit organizations as exemption status of a job may be different across organizations  The trend toward shifting costs to campuses and reducing state funding will likely continue, exacerbating the need to control/decrease costs  Associations providing grant funded positions to institutions may alter the number/ type of research projects, number of grant funded positions, and level of compensation for research professionals  Increased costs will likely result in higher tuition and fees for students and families and create additional pressures for campuses to demonstrate the value of higher education/ a degree relative to high costs being shifted to students and families 16

Potential Impact of Regulations on Higher Education: Increased Communication Employees will be nervous about their salaries, benefits, career opportunities, job changes, etc. given the proposed changes.  Senior leaders and HR will need to communicate and educate staff on the changes and the impact of the changes for employees  Communications will need to be timely and tailored to include all administrative details to reduce confusion and anxiety  Comprehensive training and education for managers and leaders across the institution will be critical to ensure compliance and appropriate administration/implementation of changes, particularly given the decentralized nature of campuses  Strategies to elevate faculty and staff morale and engagement, particularly in areas most impacted, should be considered to address retention issues 17

What have you and your organization been doing to prepare for these changes? If you haven’t, what are you thinking about doing?

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Preparation for Upcoming Changes What can you do now? 1. Conduct an audit of potential positions and employees impacted • Identification of employees that earn salaries in the $23,660 to $50,440 range • • • • •

Costs to bring employees to minimum salary threshold Overtime hours actually being worked Wage compression issues Position reclassification issues Benefit cost changes

2. Work with senior and functional leaders to review, discuss, and revise the following items to strategically manage costs and organization structure under new rules: • Position management plans and processes • Organization and job structure • Workforce or succession plans • Staffing levels • Career advancement/growth opportunities

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Preparation for Upcoming Changes continued What can you do now? 3. Examine structure to determine effect of reclassification of employees 4. Assess time and attendance processes, work flows and systems and develop plans to revise processes to support effective roll out and administration of changes 5. Begin to develop training strategies to ensure compliance

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Thank you

Carolyn Wong Senior Consultant 212-251-5938 [email protected]

Hunter Salem Associate Consultant 212-251-5183 [email protected]

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