Proposed FLSA Regulations: How Your Institution Can Prepare Now Carolyn Wong, Senior Consultant Sibson Consulting April 15, 2016
What Do These Numbers Mean to You? 5 Million 40 th percentile $50,440 60 days 2
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 3
History of FLSA* FLSA enacted Exemptions amended Coverage for government employees Coverage further extended based on revenue Overtime regulations updated 1938 1947 1961 1966 1974 1985 1989 1996 2004 2015 Hours work defined Coverage extended based on revenue and type Compensatory time off for local and state government employees Exemption for certain computer professionals * Information gathered from: Mayer, G., Collins, B., & David., B.H. The Fair Labor Standards Act (FLSA): An Overview. Congressional Research Service, 2013. 4
Proposed FLSA Changes Timeline 1 Changes proposed to FLSA DOL began review of comments 1. DOL submitted final regulations to OIRA 2 2. Senate and House introduced legislation to halt proposed FLSA regulations TBD July 6 September 4 Fall 2015 Early 2016 March 2016 TBD 2016 Grace Period Comment period ended DOL completed comment review and developed final regulations After the DOL publishes the annual increase to the salary threshold, organizations have 60 days to comply before the new threshold becomes effective. 1 Timeline indicated above is proposed and is subject to change. 2 Office of Information and Regulatory Affairs (OIRA) is a statutory part of the Office of Management and Budget (OMB) within the Executive Office of the President. Potential release of final regulations 5
Comparison of Current vs. Proposed Changes CURRENT (Since 2004) PROPOSED $455/week or $23,660/year 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 Exempt status at $100,000/year Must partake in office or non-manual work and perform at least one administrative or professional duty Job Duties Test Highly Compensated Workers (HCW) Test No changes released as of July. However, discussion around potential change to limit amount of time exempt employees could perform non-exempt work Exempt status set at $122,148 (90th percentile of weekly earnings) No changes proposed in duties required * Proposed threshold for 2016 set at 40 th percentile of earnings for all full-time salaried workers. 6
Concerns About Proposed Regulations Salary threshold of $50,440: Is seen as too high and has significant impact on higher education Does not account for regional differences and areas with lower cost of living Definition of salary threshold (40th percentile) does not match historic trends 60-day implementation period is too short: May conflict with institution s budget planning process Will be challenging for institutions to plan and administer changes, and balance competing priorities strategically Unique positions in higher education make it challenging to meet the demands of any changes to the FLSA regulations Effect on part-time exempt employment is unclear 7
What kind of specific challenges do the proposed FLSA changes pose for your institution? 8
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. 9
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 10
Are your employees aware of these impending changes? How are you currently addressing or anticipate addressing their initial concerns? 11
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 12
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 13
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 While Head Coaches will likely meet exemption requirements, the effect on Assistant Coaches remains unclear and will likely vary by institution 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 14
Potential Impact of Regulations on Higher Education: Adjustments to Functional Area Operations continued Residential Life Adjunct and Other Faculty Positions It remains unclear whether room and board and food/meal plans will be counted towards the salary threshold requirement The on-call structure for residential staff and other student affairs positions (e.g., counseling) will also need to be examined in light of the proposed regulations If a university professional s primary duty is teaching, tutoring, instructing or lecturing in the activity of imparting knowledge, and if they are employed and engaged in this activity in an educational establishment, they can be considered exempt from overtime under FLSA It is unclear if the Department of Labor will add a quantification requirement to these duties; therefore accurate timekeeping in advance of the final recommendations may be necessary 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? 18
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 19
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 20
Thank you! Carolyn Wong Senior Consultant cwong@sibson.com 212.251.5938 21