The Fair Labor Standards Act: What Will it Cost?
Heather Bradley
Human Resources affects all aspects of an employee’s work life. From compensation and benefits, HR influences how people work and how people feel about their work.
Abstract
The Fair Standards Act (FLSA) of 1938 has been the leading legislation for employment law for over three-quarters of a century. The Department of Labor announced new FLSA regulations in May of 2016 that will affect the overtime protection of more than 4 million workers and increases the salary threshold of white collar, exempt employees from $23,660 annually to $47,476 (from $455 to $913 per week). This essay examines the financial implications that the new regulations will have on higher education institutions and the impact on employee morale. This essay includes analyzation of specific data from a public higher education institution and includes a table with specific examples of salary increase information. Also included in the data are quotes from professionals in the Human Resource profession.
“All energies of government and business must be directed to increasing the national income, to putting more people into private jobs, to giving security and a feeling of security to all people in all walks of life.”
- Franklin D. Roosevelt, Plans for Recovery
Introduction
In a 2015 article for Industrial Relations: A Journal of Economy and Society, current secretary of labor Thomas E. Perez calls the Fair Labor Standards Act (FLSA) of 1938 a “living document, changing to meet the evolving needs of the nations’ workers” (Perez 1). Throughout the 78 years of its existence, the FLSA document has been amended twenty times to increase the federal minimum wage, reduce the hours in a standard work week, establish standards for overtime, give equal pay to women, and provide protection against discrimination for older workers (Perez 1). The most recent change to FLSA, and the one that I will address in this essay, came in May of 2016 from the Department of Labor. In a White House briefing on May 18, President Barack Obama and Secretary Perez announced the Department of Labor’s most recent ruling on overtime. In this ruling, the minimum threshold for a salaried, white collar, exempt worker was raised from $23,660 annually to $47,476 (from $455 to $913 per week). The increase, set to be implemented by December 1, 2016, is estimated to extend overtime protections to over 4 million workers. On the same day, at a press conference in Ohio, Vice President Joe Biden simply stated to the crowd, “Either pay the worker overtime, or cap salaried worker’s hours at 40 per week. Either way, the worker wins” (Wehrman). But, is it really as simple as Biden stated?
One industry that stands to be negatively affected by the new regulations is higher education. The FLSA overtime regulations have forced higher education institutions to evaluate current positions and salaries to determine the financial impact of the ruling. The result will most likely be that many positions which have traditionally been classified as exempt (salaried, not overtime eligible) will be transitioned to nonexempt (paid hourly, overtime eligible). Changes will affect how higher education institutions do business, serve internal and external customers, and remain financially viable. In the remainder of this essay, I will examine the negative financial implications of FLSA on higher education and the effect on employee morale.
FLSA and the Economy
In 1938, the FLSA legislation was passed to help “eliminat[e] abuse and exploitation, ensur[e] the dignity of work, and hel[p] millions of people punch their ticket to the middle class” (Perez 1). Helping people punch their ticket to the middle class continues to be one of the prevailing pillars of the FLSA. A press release from the White House on May 17, 2016 explains the thought behind raising the salary threshold and expanding overtime protection.
“Increasing overtime protections is another step in the President’s effort to grow and strengthen the middle class by raising Americans’ wages. This extra income will not only mean a better life for American families impacted by overtime protections, but will boost our economy across the board as these families spend their hard-earned wages” (Office of the Press Secretary).
President Barack Obama and Secretary Perez believe that raising the salary threshold translates to more money for the economy. According to the philosophy of the White House, employers will either pay overtime to maintain the current work week hours (40+) or they will raise employees to the threshold salary.
The question of how much the economy will be impacted by the new regulations is yet to be seen. However, after the ruling, the United States Department of Labor’s Wage and Hour Division released a study outlining the estimated economic impact. According to the study, “1.7 million affected workers who work overtime either regularly or occasionally are the workers who will likely see an increase in pay/and or an adjustment in the hours they normally work” (Wage and Hour 6). In the report, the DOL estimates that the total increase in revenue for workers that will either (a) receive an increase in pay to meet the threshold or (b) continue working 40+ hours amounts to roughly $1.2 billion yearly (Wage & Hour). For Nick Hanauer, billionaire venture capitalist and labor advocate, this $1.2 billion yearly is seen as great booster for the economy. In a May 2016 article of PBS Newshour, Hanauer says that “giving more people overtime pay will not only benefit workers, but the economy as well; as workers with more money will spend more” (Doerer). So, the White House and Hanauer are hoping that the old adage of “the more you make, the more you spend” comes true after the new regulations are in place.
Financial Impact on Higher Education
While the new regulations aim to increase economic prosperity for the country, HR professionals believe that FLSA will hinder higher education institutions financially. Associate vice president of human resources for the University of Kansas, Michael Rounds, estimates that the cost to his institution will be great. In a House Committee meeting for the overtime rule, Rounds goes over the financial impact the ruling will have on his university. He explains that the University of Kansas currently has 354 exempt employees who currently do not meet the $47,000 annual threshold. The cost to raise the employees to the new threshold would be almost $3 million dollars. Additionally, if Rounds decides to increase the salary of some or all of those 354 employees, he will incur more financial costs above the estimated base amount of $3 million.
Ashley Soublet, a human resources consultant at the University of North Carolina, states that if the University of Kansas implements the increases outlined by Rounds, it would also have to consider the “collateral impact on internal salary equity against similarly situated positions and against positions higher up the same job family tree…to maintain a salary differential” between those adjusted to the new threshold and those above (Soublet 32). In an article for CUPA HR, Soublet uses a table to examine how adjusting one salary to the new threshold compounds the financial impact to the institution.
| Position | Current Salary | % Adjustment | New Salary | $ Difference |
|---|---|---|---|---|
| Development Office I | $42,000 | 21.0% | $50,820 | $8,820 |
| Development Officer II | $51,000 | 10.5% | $56,355 | $5,355 |
| Director of Development | $65,000 | 5.25% | $68,413 | $3,413 |
As shown in the table, the salary of the Development Officer 1 would be adjusted to $50,820 which is just above the threshold; an increase of $8,820. The two positions in the organizational chart above the Development Officer would also receive increases to maintain salary differentials and reduce compression. Overall, the financial impact for that initial adjustment would be $17,588. If the example is applied to the University of Kansas, the estimated cost of adjusting the salaries of those exempt employees would be doubled.
How is a higher education institution to financially make the adjustment and sustain those wages? Sitting before the House Committee in Washington, Rounds states that for his institution, the result of making that kind of change would be to “cut back on the number of research openings and opportunities that are available” and “tuition would ultimately be pushed higher” (CUPA HR). So, the costs of the changes would transfer to the student and the student’s family. This transfer comes at a time when tuition is already at an all-time high for both private and public institutions. According to the U.S. Government Accountability Office (GOA), “the costs of higher education have led to widespread concern that college is becoming unaffordable for many students and their families” (GOA 1). The concern expressed by the GOA extends across both private and publicly funded colleges. Further increases in tuition may negatively affect enrollment and the ability of students and their families to afford secondary education.
FLSA and Employee Morale
FLSA changes will not only financially impact institutions, but will also impact employee relations as well. Not all institutions will be able to increase salaries to the exempt threshold. As a result, employees that are transitioned to nonexempt status due to the salary threshold could feel as though it is a demotion. In turn, overall “morale may suffer as newly nonexempt employees will need to track their time and may feel they have been demoted to less prestigious positions within the company” (Washko & Saunders). Formally exempt employees will have to keep track of their working hours and may feel as though they are being micromanaged or rushed to finish work within the specified 40 hours. Dana Wilkes, editor and manager of the Society for Human Resource Management (SHRM), believes that lessening morale will not only affect the transitioned employees. She states that “formerly exempt employees who were accustomed to working as many hours as needed to finish a job may find that they can’t get all their work done in a 40-hour week. The work that’s left undone, then, may fall to those who remain exempt” (Wilkes). Responsibilities of those formerly exempt may be shifted to exempt colleagues and managers who will be required to work the hours necessary to complete the work and keep the institution productive. Increasing hours for no additional pay does not encourage employees to think positively about the institution and will ultimately affect retention rates.
Conclusion
While the federal government is interested in increasing wages for millions of Americans, it is indeed placing a hardship on higher education institutions. Implementation of the new regulations will be costly if institutions decide to increase salaries for employees who fall below the threshold. Not increasing salaries and transitioning employees to nonexempt will have an effect on the morale of the employees and their colleagues. Higher education institutions will pay a price; either in dollars or people.
Works Cited
Roosevelt, Franklin D. “Fireside Chat: PLANS FOR RECOVERY.” Vital Speeches Of The Day 4.14 (1938):435. Business Source Complete. Web. 7 July 2016.
Wehrman, Jessica. “Joe Biden to announce overtime rule at Jeni’s in Columbus.” The Columbus Dispatch.18 May 2016. Web. 8 July 2016.
Perez, Thomas E. “The Fair Standards Act: A Living Document.” Industrial Relations: A Journal of Economy and Society. Vol. 54. Iss.4. 11 Sep. 2015. Web. 07 July 2016.
Office of the Press Secretary. “FACT SHEET: Growing Middle Class Paychecks and Helping Working Families Get Ahead By Expanding Overtime Pay.” The White House. 17 May 2016. Web. 09 July 2016.
CUPA HR. “House Committee Holds Hearing on Final Overtime Rule.” The Higher Ed Workplace Blog. 15 June 2016. Web. 09 July 2016.
Soublet, Ashley. “FLSA in Higher Ed.: Minimizing Risks and Managing Challenges.” The Higher Education Workplace. CUPA HR. Spring 2016. Web. 09 July 2016.
Washko, Liz. Diane M. Saunders. “Preparing for the Upcoming Amendments to the FLSA Overtime Regulations: A Toolkit for Retail and Hospitality Employers.” Ogletree Deakins. 4 January 2016. Web. 09 July 2016.
Wage and Hour Division. “Overtime Rule: Summary of the Economic Impact Study.” Department of Labor. June 2016. Web. 30 July 2016.
Doerer, Kristen. “Will the new overtime regulations help or hurt the economy?” PBS Newshour. 24 May 2016. Web. 30 July 2016.
U.S. Government Accountability Office. “Higher Education: State Funding Trends and Policies on Affordability.” Report to the Chairman, Committee on Health, Education, Labor, and Pensions, United States Senate. 16 December 2014. Web. 30 July 2016.