Higher Ed: Start Planning for Higher Compensation

The DOL is exploring new regulations to increase the wage test for exempt employees. Predictions range from a repeat of the 2016 proposed amount of $47,476 to an inflation adjusted amount of $56,836, and possibly even higher. Regardless of the amount, odds are that an increase is in our future, perhaps as early as the end of 2022. (Image courtesy of Shutterstock)

Okay, let me apologize in advance, because I’m probably going to get pretty far down in the weeds on this topic. Stay with me.

Everyone knows that we have both federal and state minimum wage levels, and that all employees must be paid at least that minimum amount. Plus, workers who are paid by the hour must be paid overtime for hours worked above 40 hours per week. (There are additional and more complicated rules in some states). And most managers know that some positions can be considered “exempt” from those overtime rules and be paid a monthly or weekly salary that does not change depending on how many hours they work. 

Unfortunately, this is the extent of what many managers know about compensation. They don’t understand what it takes to classify a position as “exempt,” and they don’t understand the consequences of classifying a position incorrectly. So, lets cover those bases first.

For a position to be considered exempt, it must pass two tests: a duties test and a wage test. The duties tests vary, based on the type of the position, but the underlying premise is that the incumbent must regularly make independent decisions in matters of significance. I know this is complicated language, but the bottom line is that if someone is given tasks to perform, is told how to perform those tasks, and is closely monitored while they complete them, that position will fail the duties test and need to be paid hourly. There are many variations on this analysis, so for purposes of this post, let’s use the basic understanding that to be exempt, the employee must be able to regularly make independent decisions about important things.

Secondly is the wages test, and this is why I’m writing this post. As of January 1, 2022, the minimum wage for the professional exemption is $684 per week, or $35,568 per year. While that minimum does not apply to all jobs, it does address the majority of exempt jobs in higher education (excluding faculty positions – a topic we’ll leave for another day). In 2016, the federal government tried to raise this minimum to $47,476. Lots of institutions scrambled, some actually adjusting their salary structures to this new level. But at the last moment, the federal government backpedaled on the change, withdrawing the proposal. But we expect the Department of Labor (DOL) to try again.

The DOL is exploring new regulations to increase the wage test to somewhere around $50,000. Some speculate they could try again at the $47,476 level proposed a few years ago, or propose an inflation adjusted amount of $56,836. Others have thrown out amounts over $70,000. We don’t know how much it will go up (or if it will move at all), but the odds are that an increase is in our future, and that it could come as soon as later this year.

What does this mean for Higher Education? If the salary test is raised, say to $50,000, that means that every institution will need to make one of two choices. The first choice is to increase salaries to $50,000 for anyone they want to be considered exempt. Then they will have to deal with the salary compression issues that will arise when people who were making just over $50,000 but are now being paid the same as others who used to make a lot less. This could be an expensive choice. The other choice is simply to tell those people who were exempt and making less than $50,000 that they will now be considered non-exempt and be paid hourly at an equivalent “hourly” rate. That works okay financially, but now those people will need to track their time and be limited to 40 hours per week, to avoid paying overtime that will drive up your organization’s costs. You won’t spend any more money, but you likely will lose some productivity. Plus, now you’ll have a new set of time sheets to process and approve, among other things.  This option is not zero-cost, but it is probably less expensive than the first option.

This process (minimum wage, overtime, exemptions, etc.) is the responsibility of the Department of Labor – Wage and Hour Division. It’s unlikely that they will suddenly knock on your door and ask to audit your wages and practices. However, should one of your employees get disgruntled and make a complaint to the Wage and Hour Division stating that they feel they are not getting the overtime they deserve, well then … that is a whole other kettle of fish. And should you be audited, you could be liable for the unpaid overtime for the last two years. There’s also a chance that they’ll look at all similarly situated employees. The resulting back pay, interest, and fines could be expensive.

So, what should you do now? As I said, nothing has been decided. There is no certainty about whether, or how much, anything will change. At this stage, you simply need to be thinking ahead. I suggest you start exploring scenarios and modeling the costs. What would you do if the minimum went to $40,000? What about $50,000? Or even $60,000? Look at both of your options for each scenario and estimate the financial, productivity, and emotional (yes, compensation is often an emotional subject) impact of each.  Think about what you’ll need to do to fund each of those scenarios. Use this time to begin to ensure you have your compensation house in order – that you’ve updated your job descriptions and that you are properly classifying positions as exempt or nonexempt, based on today’s rules.

Salaries and benefits are most likely your highest category of expense, and if these regulations change, your costs will go up – maybe just a little, or maybe a lot. Failure to properly manage your compensation processes can also be very expensive, whether that manifests through a Wage and Hour claim, or an EEOC Discrimination claim. It pays to pay attention, to do things right, and to be consistent. Change is in the wind. It’s time to batten down the hatches and get ready for a possible storm.

Roger Dusing, PhD, is a Senior Consultant and the Higher Education Practice Leader at OMNI. He previously served as Chief Human Resource Officer at Park University for eleven years. With over 40 years of HR experience, including 30 years in C-suite level roles, he looks forward to reflecting his passion for higher education in his work to bring affordable, high-quality HR services to small- to medium-sized colleges and universities. 

Roger holds a PhD in Business Management, with a concentration in Human Resources from Northcentral University, a Master of Science in Administration from Central Michigan University, and a BS in Industrial Engineering from Bradley University. He also authored the book “I’m Fired?!? A Business Fable About the Challenges of Losing One Job and Finding Another.”