The U.S. Department of Labor (DOL) issued a final rule last night substantially increasing the annual salary an employee must earn to be exempt from overtime pay requirements. The final rule—which takes effect on December 1, 2016,—will require sweeping changes to the employment relationships between institutions of higher education and many of their employees both later this year and beyond.

The new rule increases the salary requirements for an exempt status, raising the annual threshold from $23,660 to $47,476 for professional, executive, administrative, and certain other employees who fall into another white collar overtime exemption. These income requirements do not apply to bona fide teachers, who will remain exempt as long as their primary duties are teaching, tutoring, lecturing, or instructing. In other words, the new rule means that most non-faculty employees must be paid overtime for working more than 40 hours in a week unless they earn a salary of at least $913 per week or $47,476 annually and primarily perform certain exempt duties. Moreover, an employee will not be eligible for the highly compensated exemption unless paid at least $134,004, up from $100,000 under the old rule. The salary threshold under the new rule will increase automatically every three years based on data from the U.S. Bureau of Labor Statistics. The increased thresholds will be published 150 days before taking effect.

Non-discretionary bonuses, incentive pay, or commissions may count for no more than a 10 percent credit against the new salary standard and must be paid quarterly. Surprisingly, no changes were made to any of the "duties tests" for the exemptions, and state sponsored colleges and universities will still be able to use compensatory time, consistent with existing DOL regulations.

While the changes associated with the new rule apply to all employers, they will disproportionally impact institutions of higher education. Campuses do not operate within a traditional workweek or calendar year, making compliance difficult. Moreover, the list of potentially affected higher education employees is long, as employees who may earn less than the new minimum salary threshold include those in departments such as academic affairs, student affairs, institutional affairs, fiscal affairs, auxiliary services, external affairs, facilities, information techonology, research and clinical professionals, athletic affairs, managers in food service, security, and building and grounds, and community outreach/educational extention functions. Generally, athletic coaches will be exempt if primarily involved in "teaching" (i.e. coaching and not recruiting or other duties), and postdoctoral fellows will be exempt if primarily engaged in teaching. Graduate and undergraduate students conducting research in the course of obtaining a degree are considered students rather than employees, and will not be subject to the salary requirements.

Complicating matters is the fact that the charge to increase salary or pay overtime comes at the same time colleges are being pressured to manage tuition costs. Notwithstanding these challenges, institutions must focus intently on implementing the necessary reforms and should be prepared to face aggressive enforcement by the DOL after the effective date. Accordingly, we recommend institutions consider the following steps:

  • Audit the Exemptions. Institutions should conduct a comprehensive audit of positions and employees potentially impacted by the changes, focusing on employees who earn salaries in the $23,660 to $47,476 range, while keeping in mind anticipated automatic increases in the future.

  • Review Job Duties and Descriptions. It is also a good time to identify any employees potentially misclassified as exempt, since reclassifications made this year are less likely to raise flags about past errors. Institutions should therefore review job descriptions to ensure that the primary duties of all exempt employees satisfy one of the exemptions, which have not changed under the new rule. Part of this audit should include a comparison between the description and the employee’s actual duties to ensure the actual duties qualify.

  • Develop a Compliance Strategy. For each employee or classification affected by the final rule or identified as misclassified, institutions should determine whether their interests are better served by raising salaries to the new minimum, adjusting duties, or reclassifying to non-exempt status and paying overtime. There are a number of factors relevant to this consideration, including the number of hours worked by the employee, the practicality of imposing overtime controls, budgets, the nature of the position, the broader effects any reclassification will have on the employer, career advancement, and staffing levels.

  • Plan Communications. An important part of a compliance strategy is determining how changes will be communicated to employees and crafting a careful message, keeping in mind that some employees will likely react negatively to these changes, particularly if they perceive a loss in compensation, autonomy, or status.

  • Review Policies. Institutions should review their timekeeping and overtime policies and practices to determine where adjustments will be needed to comply with the final rule and to make sure adequate safeguards are in place to control overtime costs.

  • Additional Training. Employees reclassified as nonexempt, as well as managers and administrators, may need additional training regarding recording time and limitations on working overtime.

Ballard Spahr's Higher Education and Labor and Employment Groups regularly assist clients with Fair Labor Standards Act compliance, audits, and litigation, and have extensive experience guiding employers through exemption audits and reclassifications.

Copyright © 2016 by Ballard Spahr LLP.
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