Trusteeship Podcast Episode 44: New Overtime Regulations – What Boards Need to Know

Morgan Alexander:
Welcome to The Trusteeship Podcast, from the Association of Governing Boards of Universities and Colleges. We cover everything higher education leaders need to know about the challenges facing our nation’s colleges and universities. More importantly, we provide the facts and insight you need to solve those challenges and to be the storytellers and advocates that higher education needs.

On April 26th, the Department of Labor issued a new rule affecting exempt and nonexempt employee status. If you’re unfamiliar with those terms, they help classify employees based on job characteristics and determine whether federal law mandates that employees be considered eligible for overtime pay. The Department of Labor’s new rule could change who falls into those classifications, including staff and faculty on campuses around the country.

Joining us today is my friend and colleague, Alex Nock, principal at Penn Hill Group. He’ll explain what you need to know about the DOL rule, what it means for colleges and universities, and what questions boards should be asking senior administrators. I’m Morgan Alexander, your host for this special episode of The Trusteeship Podcast. Let’s get started.

Alex, break it down for us. What does the new rule say?

Alex Nock:
Good to be with you again. This rule obviously has been a long time coming. The Biden administration has been very clear that they wanted to regulate in this area. As some of our listeners might remember, the last administration regulated in this area as well, and so did the previous administration, although their regulations ultimately were blocked by courts.

Really when you think about this, you have to think about what is the situation this rule applies to? It’s who gets paid overtime. Hourly employees get paid overtime. If you are clocking in and clocking out, you’re going to have an overtime requirement. Where the question comes in really is when do salaried or full-time employees that are in executive, administrative, and professional positions fall under the overtime rules? When are they exempt from the Fair Labor Standards Act overtime requirements and when are they not exempt?

Generally, employees are exempt from the Fair Labor Standards Act overtime requirements if they are a bonafide executive, administrative, or professionals. Now of course, you can’t take, for instance, an administrative assistant that is not in those job classifications and call him or her the president of the company, and automatically they’re not subject to overtime. Job titles don’t matter. But you look at their duties and what they do. There are basically three tests that apply here. Is an individual paid a salary? I.E., they’re paid an amount regardless of the amount of time they work or the quality of their work. Are they paid a specified weekly level? I.E., do they make X amount per week? Then third, do they perform executive, administrative and professional duties?

Where this rule is coming into play, this new rule, Morgan, is on that second test. What is their equivalent weekly salary? Right now, today, this very day which is May 8th, 2024, the weekly salary threshold is $684 a week or approximately $35,500 a year. If you’re making below that amount, then you are essentially covered by the overtime requirements. You have to be paid overtime if you work more than 40 hours a week. This rule has several tiers where they changed that salary threshold. Starting this July 1, literally a couple of months from now, or weeks depending on your point of view, they will increase that salary threshold to $844 a week which is about $43,800 a year. Then on January 1st, 2025, so approximately seven months from now, the rule increases that to $58,700 a year. It’s not quite double essentially in seven months, but it’s rounding-error wise it increased that up.

Morgan Alexander:
It’s a sizeable increase.

Alex Nock:
Yeah. Then lastly, the rule requires the Department, every three years, starting with January 1, 2027, to increase these thresholds for inflation. The next scheduled increase we would see is in 2027. It would take that $58,700 and increase it by what inflation is. Obviously, we can’t predict that in the future.

But the rule is effective, as I said, July 1, 2024, so just a couple months from now. What some folks I think have lost a little track of, but obviously higher education officials and leaders need to be aware of is that yes, there is an increase on July 1. But six months later, there’s another increase to $58,700 a year. That’s definitely ramping up pretty quickly and I think, Morgan, that’s part of the impact we’re going to talk about.

Morgan Alexander:
Great. I should mention that this isn’t just affecting colleges and universities. This is affecting most employers, including institutionally related foundations. There are a number of foundations that are AGB members who have staff that will likely be impacted by this rule as well so they need to be thinking about the impacts for them and not just what’s happening on campus throughout the institution.

Let’s talk a little bit about those impacts. What does this mean? What do boards have to be thinking about? There’s obviously an HR component, there’s obviously an operations component for the management team to figure out. But when the boards are looking at this from a high level, what are the impacts that they need to be thinking about and asking senior administrators to answer questions on?

Alex Nock:
This is a change in a very short period of time. I think the most immediate thing is fiscal. It’s obvious, when you look at these thresholds. Employers of all stripes, as you said, Morgan, boards, nonprofits, everybody will look at this and say, “Okay, I may have a certain segment of my workforce now subject to overtime that wasn’t subject before.” Probably for most colleges and universities, there’s probably some segment of their workforce that already is subject to overtime.

Morgan Alexander:
Sure.

Alex Nock:
It’s not like they have to totally reinvent a system for the most part. But it could be a large increase, depending on where individual institutions have set their salaries. Obviously, this is a national number so $58,700 a year certainly brings a person a different standard of living in New York City than it does in a rural area, with housing costs, and transportation costs, and things like that. There may be a lot of reasons why salary levels are different in different places of the country. This is a national figure.

You have to look at your workforce and say, the immediate thing is, “What segment of our workforce does this impact?” I think then the choice is okay, for those individuals that may be subject to overtime, does it make sense fiscally for an institution to raise their salaries or deal with overtime? Also, Morgan, boards will have to ask the folks that actually do the day-to-day work on this, “What exposure do we have on overtime?” It is possible that you have people that are subject to overtime that generally won’t work overtime. Their jobs are very scheduled out and it’s not a big deal. Others, you may learn that they were spending more than 40 hours a week.

Morgan Alexander:
Right.

Alex Nock:
Then that’s a value proposition, both from a complexity issue of figuring out whether or not to structure them in an overtime position, or do you raise their salary? I think part of DOL’s motivation here is possibly you’re going to see a salary boost for some individuals by employers as well. I’m sure that would be welcome by a lot of campus employees.

Boards have to think, “What is the fiscal impact to adjust?” It may be big, it may be small. Either way, it’s an issue.

Morgan Alexander:
Right. That brings to mind the idea of labor contracts and unions. There may have to be some re-negotiations on the part of some unions that have staff contracts and that sort of thing. Maybe a board thought that it had allocated enough budgetary resources towards labor and staff costs, and all of a sudden, they now have to rethink that because they have to renegotiate a contract. I think the fiscal point is obviously the number one issue. Talking from an exposure and a risk standpoint I think is definitely one we have to keep a lookout for.

Is there anything else that boards out to be thinking about?

Alex Nock:
Obviously, you have an issue here where salaried employees are working on a salary, they don’t punch a clock, they don’t record their hours. If an individual is let’s say making $42,000 a year and in July, that’s their salary, and that person has to start recording their hours. Does that change somehow how their manager or themselves think about their job? That’s the HR component, I think really you raised, Morgan. Is that what the employer wants? Is that what the individual wants? How does that make them feel about their employment? That’s going to really differ from person to person.

Morgan Alexander:
For sure.

Alex Nock:
But I could see someone going, “Oh, why do I have to record my hours now?” Then they may learn that they get paid more if they do that. That may be something to overcome. But if someone didn’t think of themselves as an hourly employee, and then all of a sudden, realizes they are not but they have to record their time as such, is that viewed differently by different people?

Morgan Alexander:
Sure.

Alex Nock:
I could see that being something that HR operations, and therefore boards should think about. Are we poised to have those conversations with employees? Not the board itself, but the apparatus of the institution, to ensure that you might have a superstar employee that you’re transferring to an overtime situation, and you want to make sure that employee knows, “This is no reflection on you. It’s not a promotion, it’s not a demotion. It’s us wanting to comply with the law,” in those respects. “That’s what we’re doing.” But obviously, that could make people feel differently.

Morgan Alexander:
Yeah, that’s absolutely true. Okay, we’ve heard about what the rule is, we’ve heard about the impact the boards need to be looking out for. Where does the rule go from here?

Alex Nock:
Yeah, that’s a great question. I would expect that a number of individuals will seek to overturn or enjoin this rule in court. I made a reference at the beginning of this session here, where the Obama administration attempted to raise these very thresholds we were talking about during their term, right near the end of their term. It was enjoined by a Federal District Court judge nationwide, which is an everyday thing for the District level court. But that was the decision made and that effectively blocked the rule from taking effect. I would assume there’s someone out there that wants to litigate this. Is there a judge that would enjoin this rule and cause it to be paused, in terms of its implementation? Obviously, we have about two months here for someone to take that on and do that.

But since the last Obama administration regulation was litigated in this fashion, I would expect someone to file a case and do that. The Trump administration regulation did go through. It did not raise the salary thresholds as much.  We have the 35,500 because the Trump administration did raise it and it wasn’t objected to, I guess, by individuals deciding whether or not there was a legal argument to make. Morgan, as you know, and for our listeners, I’m not a lawyer so I won’t judge a case that a plaintiff might have here on this. But someone will probably raise the issue.

I think the question really is what do you do if you’re an institution? I think you have to treat this rule as a rule now. You have to say, “Okay, on July 1, I’m going to be at 43,800.” Now we have some time, between now and January 1, where it rises up between 58,700. I think you might think about budgeting for that, if that’s a fiscal issue, either the overtime or the increased salaries. Boards, again, thinking about the fiscal nature of things. It’s probably not something, if you decided to raise people’s salaries, that if this is enjoined on January 15th, it would make you a real popular president if you decided to lower people back down under the threshold. This is the rule and it is a rule in place, and it is required to be adhered to or you’re subject to wage and hour investigations by the Department of Labor. At right now, unless a court enjoins it.

Morgan Alexander:
Right. It’s really hard to lower a wage or lower a salary after you’ve raised it.

Alex Nock:
I just think common sense.

Morgan Alexander:
Yeah.

Alex Nock:
You’d be a pretty unpopular department head, dean, college president, or provost if you said, “Hey, guys, sorry about that.” I just think that would be a challenge. But I guess, maybe you don’t need to make the decision on May 8th. But if you’re into June, if you pay monthly or you pay it biweekly, that’s going to catch up on you pretty quick. I could see a need to process through this.

Morgan, one of the things I suppose you could do as an institution is understand the fiscal impact. Maybe you’re not sure if this rule’s going to be in place because a court may be acting, maybe you do an overtime month or two. Again, that would be an individual decision by an institution. Realizing that, “We’re doing overtime now, but you know what, come August, and then September and October, if the rule’s not changed, maybe we’ll make a different decision then.” July 1 is mostly what do you have to have in place?

Morgan Alexander:
Yeah. Okay. Well, Alex, thank you so much for taking the time to talk with me about this. This is an issue that is one in the litany of issues that colleges and universities are facing this spring and into the summer. I’m really glad that we had a chance to talk about this and make certain that it doesn’t drop off the radar.

For anyone who wants to know more about the rule, you can check out the AGB Policy Alert that we published on this topic. You can find it at agb.org, and I’ll try to put it in the show notes. Thanks so much for listening. Thank you, Alex, really appreciate it. Thanks to Penn Hill. We’ll talk to you all later.