OVERTIME EXEMPTIONS IN THE CONSTRUCTION INDUSTRY: ROCK SOLID OR SHIFTING SANDS?

OVERTIME EXEMPTIONS IN THE CONSTRUCTION INDUSTRY: ROCK SOLID OR SHIFTING SANDS? John J. Krimm, Jr. Schottenstein Zox & Dunn Co., LPA 250 West Street Columbus, Ohio 43215 jkrimm@szd.com www.szd.com 1

INTRODUCTION The Department of Labor has estimated that around 70% of all employers routinely violate wage-and-hour laws. This apparently has not been lost on the plaintiffs employment bar. According to one report, there was a 77% increase in wage-and-hour suits in the four years following the Department of Labor s revisions to the white collar exemption regulations in April of 2004. The explosive growth in this area continued last year, as well, with another 18% increase, as wage-and-hour litigation continued to outpace all other types of workplace class actions. 1 Although mega-companies in the insurance, retail, financial services, pharmaceutical, and telecom industries have been the most visible targets of wage-and-hour collective actions, Paul Siegal, a partner at Jackson Lewis, was quoted as saying, You see a trend toward small and mid-sized employers having these actions filed against them - - employers who can t afford to pay to defend the cases. 2 Mr. Siegel has described such suits as the Wild West of claims. 3 Given the nature of its business and the size of its employers, the construction industry thus far has not been targeted by those lawyers seeking to strike gold with FLSA collective actions. The publicity which these collective actions frequently garner has, however, arguably heightened the awareness amongst workers more generally, leading them to question whether their employers are among the 70% which, according to the DOL, seem to have difficulty complying with the FLSA. Because of the availability of prevailing plaintiff attorneys fees and the potential for liquidated damages, being sued by even a single employee for allegedly failing to pay overtime as required under the FLSA can be a significant matter for any employer, even one that is not faced with the spectre of a large collective action. Because of this, all employers, 1 See Seyfarth Shaw s Seventh Annual Workplace Class Action Litigation Report, released in January 2011. 2 Inside Counsel, Clock Work: Wage and Hour Cases Top Employment Class Actions (March 2010). 3 Id. 2

including construction employers, should closely monitor their payroll practices to ensure that they are in compliance with the FLSA. I. THE WHITE COLLAR EXEMPTIONS FROM OVERTIME PAY In general, the Fair Labor Standards Act, 29 USC 201 et seq, mandates that employees be compensated at one-and-one-half times their regular rate of pay for all hours worked in excess of 40 in a work week. See 29 USC 207(a)(1). The FLSA provides a number of exemptions from this requirement, including an exemption for any employee engaged in a bona fide executive, administrative, or professional capacity. See 29 U.S.C. 213(a)(1). Exemptions from the overtime requirements of the FLSA are to be narrowly construed against the employers seeking to assert them and their application limited to those establishments plainly and unmistakably within their terms and spirit. Arnold v. Ben Kanowsky, Inc., 361 U.S. 388, 392 (1960). The employer bears the burden of proving the exemption. See, Dalheim v. KDFW- TV, 918 F.2d 1220, 1224 (5 th Cir. 1990). A. The Executive Exemption (29 CFR 541.100) An employee is employed in a bona fide executive capacity if all of the following are present: The employee is compensated on a salary basis at a rate not less than $455 per week; The employee s primary duty is management of the enterprise or of a customarily recognized department or subdivision thereof; The employee customarily and regularly directs the work of two or more other employees (FTEs); and The employee has the authority to hire or fire other employees or makes recommendations that are given particular weight as to the hiring, firing, or other change in status of employees. 3

1. Primary Duty (29 CFR 541.700) Primary duty is the principal, main, major or most important duty that the employee performs. Factors to consider in determining an employee s primary duty include, but are not limited to: Relative importance of the exempt duties Amount of time spent on exempt duties Relative freedom from direct supervision Relationship between the employee s salary and the wages paid to other employees for the same kind of nonexempt work Employees who spend more than 50% of their time performing exempt work will generally satisfy the primary duty requirement; however, the regulations do not require that exempt employees spend more than 50% of their time performing exempt work. 2. Management (29 CFR 541.102) Management duties include such things as: Interviewing, selecting, and training employees Setting and adjusting pay and work hours Maintaining production and sales records Appraising employee productivity and efficiency Handling employee complaints and grievances Disciplining employees Planning and apportioning work among employees Determining the techniques to be used; the type of materials, supplies, machinery, equipment or tools to be used; or the merchandise to be bought, stocked, and sold Providing for the safety and security of employees or property 4

Planning and controlling the budget Monitoring or implementing legal compliance measures 3. Department or Subdivision (29 CFR 541.103) A customarily recognized department or subdivision must have a permanent status and continuing function. Need not be physically within the employer s establishment, and may move from place to place Continuity of the same subordinate personnel is not essential to the existence of a recognized unit The employee in charge of each branch establishment is in charge of a recognized subdivision Does not include a mere collection of employees assigned from time to time to a specific job 4. Customary and Regular Direction of Two or More Employees Customarily and regularly means a frequency that is greater than occasional but which may, of course, be less than constant. (29 CFR 541.701) Includes work normally and recurrently performed every workweek Does not include isolated or one time tasks Two or more other employees means two full-time employees or the equivalent. (29 CFR 541.104). Full-time generally means 40 hours per week The supervision of the same employees can be distributed among two or more exempt executives, but the hours worked by an employee cannot be credited more than once Department of Labor appears to subscribe to an 80 hour rule, which generally requires an exempt executive to direct a total of 80 employee-hours of work each week. See Johnson v. Big Lots Stores, Inc., 561 F.Supp. 2d 567, 577 (E.D. La. 2008) (quoting 69 Fed. Reg. 22135). 5

5. The Authority to Hire or Fire or Recommend Changes in Status (29 CFR 541.104) Disjunctive requirement - - the authority to hire or fire or to make recommendations that are given particular weight Factors in determining if recommendations are given particular weight include: Whether it is part of the employee s job duties to make suggestions and recommendations The frequency with which suggestions and recommendations are made or requested The frequency with which the employee s suggestions and recommendations are relied upon (See 29 CFR 541.105). 6. Construction Industry Cases Sutton v. Engineered Systems, Inc., 24 WH Cases 108 (8 th Cir. 1979) (Job superintendent responsible for installation of an airport lighting and instrument landing system qualified as exempt executive. Court finds that project to which superintendent was assigned was a recognized department or subdivision of the business where [t]here was a trailer on site with a telephone and office equipment and the project was one of major proportions with an expected work period of 480 days. ). Armitage v. Dolphin Plumbing & Mechanical, LLC, 510 F.Supp. 2d 763(M.D. Fla. 2007) (Court determines, after trial, that plumbing subcontractor s project manager who runs job sites was exempt executive. Project manager was responsible for, among other things, keeping track of the time and rate of production of workers, ensuring that the appropriate materials and equipment were on hand at each construction site, hiring/firing and directing the work of day laborers on the job site, making sure that the proper permits were obtained, and dealing with supplier invoices and payments. Court found that each construction project was customarily treated as a separate department or division within the meaning of the law as each construction project had a project manager who reported to the company president.). Slusser v. Vantage Builders, Inc., 13 WH Cases 2d 456 (D.N.M. 2008) (Court grants defendant s motion for summary judgment, finding that assistant controller of home builder qualified for executive exemption. Although plaintiff spent the majority of 6

her time performing clerical work, she was in charge of defendant s accounting department, assigning/directing/ apportioning work to employees in the department and disciplining/evaluating employees in the department. Plaintiff also attended weekly management meetings and was a member of the company s audit committee.). Gautier Rodriguez v. Mason Technologies, Inc., 3 WH Cases 2d 733 (D.P.R. 1996) (Heavy equipment maintenance supervisor and general maintenance mechanic supervisor held to be exempt executive employees. Supervisors were in charge of distinct and permanent divisions of the company, supervised 9-11 employees, prepared work schedules, assigned work, decided which equipment to use for each job, and ordered parts for jobs.). Wage and Hour Opinion Letter FLSA 2007-3 (January 25, 2007) Re: Construction Superintendent/Executive Exemption. (Project superintendent whose primary function is to supervise the day-today activities of the construction project qualifies for executive exemption where superintendent is paid on a salary basis in excess of $455.00 per week, oversees the work of subcontractors employed on the project and supervises the labor force employed for the project, consisting of regular company personnel, project specific temporary personnel, and/or union personnel, superintendent meets with the client s representatives, makes decisions regarding the scope of work of subcontractors, makes purchasing decisions as needed for the project, and reports and makes recommendations to the project manager regarding employee advancement, firing, and change of status. ). B. The Administrative Exemption (29 CFR 541.200) An employee is employed in a bona fide administrative capacity if all of the following are present: The employee is compensated on a salary basis at a rate not less than $455 per week; The employee s primary duty is performing office or nonmanual work directly related to the management or general business operations of the employer or the employer s customers; and The employee s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance. 7

1. Exercise of Discretion and Independent Judgment With Respect to Matters of Significance (29 CFR 541.202) The comparison and evaluation of possible courses of conduct, and acting or making a decision after considering various possibilities. Decisions and recommendations may be reviewed at a higher level and, upon occasion, revised or reversed. Matters of Significance refers to the level of importance or consequence of the work performed. Factors include, but are not limited to: Whether the employee has authority to formulate, affect, interpret, or implement management policies or operating practices Whether the employee performs work that affects business operations to a substantial degree, even if the employee s assignments are related to operation of a particular segment of the business Whether the employee has authority to commit the employer in matters that have significant financial impact Whether the employee can waive or deviate from established policies and procedures without prior approval Whether the employee provides consultation or expert advice to management Whether the employee is included in planning long or short-term business objectives Whether the employee investigates and resolves matters of significance on behalf of management Whether the employee represents the company in handling complaints, arbitrating disputes or resolving grievances Discretion and independent judgment does not involve: Applying well-established techniques, procedures, or specific standards described in manuals or other sources 8

Clerical or secretarial work Recording or tabulating data Performing mechanical, repetitive, recurrent or routine work Exempt employees may use manuals, guidelines or other established procedures if they contain or relate to highly technical, scientific, legal, financial, or other similarly complex matters that can be understood or interpreted only by those with advanced or specialized knowledge or skills. Employees are not exempt if they use manuals to apply wellestablished techniques or procedures within closely prescribed limits. 2. Management or General Business Operations (29 CFR 541.201) Refers to the type of work performed by the employee. Work must be directly related to the running or the servicing of the business. Does not include production or selling. Includes areas such as tax, finance, accounting, budgeting, auditing, insurance, quality control, purchasing, procurement, advertising, marketing, research, safety and health, human resources, employee benefits, labor relations, public and government relations, legal and regulatory compliance, computer network/internet/database administration, and the like. May include management or general business operations of the employer s customers (e.g., consulting services). 3. Construction Industry Cases Reyes v. Hollywood Woodworking Inc., 10 WH Cases 2d 796 (S.D. Fla. 2005) (Court grants summary judgment to employer, finding that Plaintiff, a project estimator, qualified for the administrative exemption. Defendant was in the business of manufacturing architectural woodwork products for the hospitality industry and certain public projects such as courthouses and performing arts centers, ranging in cost from $10,000 to $10,000,000. Plaintiff s office job was to review a given set of architectural drawings and estimate the costs for the various wood materials and labor that would accomplish building and installing the particular woodwork 9

contemplated by the plans at a competitive price. Id., at 797. Court finds that the preparation of bids is not sales or production work, but rather is an important part of general business operations necessary for the Defendants to obtain production work and sell their products. Id., at 799. The Court rejected Plaintiff s contention that he merely applie[d] his skill and expertise to implement procedures and standards set by higher management, finding instead that Plaintiff exercised discretion in matters of significance since Plaintiff s bid estimates were recommendations that while subject to some review, were recommendations for action that when in the form of final bids, financially committed Defendants. Id. Court noted that Plaintiff utilizes his judgment in selecting which fabrication method to use to compute the labor cost part of the bid which could account for differences in result up to 20% by two different estimators who could reach different conclusions without either making any errors, in contrast to simply picking numbers from a book and plugging them into a computer program. Id., at 800.). Rock v. Ray Anthony International, 16 WH Cases 2d 266 (11 th Cir. 2010) (Court affirms trial court s finding that Plaintiff, a dispatcher in Defendant s crane rental division, was an administrative employee exempt from the overtime requirements of the FLSA. Plaintiff s duties included customer communication, choosing the appropriate crane for specific jobs, assigning operators to cranes, overseeing other employees, preparing and reviewing job tickets, and maintaining the crane rental schedule. Id., at 268. Plaintiff was also responsible for selecting the type of materials, supplies, machinery, equipment, and tools that were needed to meet the customers needs. Id. Court rejected Plaintiff s contention that his position was more akin to sales and retail, finding instead that Plaintiff effectively managed [Defendant s] crane rental department, which the district court found was the heart of [Defendant s] business and necessary to [Defendant s] business operations. Id. Court noted that Department of Labor s Field Operations Handbook, which states that dispatchers in the bus and trucking industry who merely apply their knowledge in following prescribed procedures and techniques [do] not exercise[e] discretion and independent judgment within the meaning of the regulation also states that a dispatcher may exercise discretion and independent judgment where, for example, the dispatcher coordinates the movement of company vehicles and equipment over non-standard routes or handles emergency situations. Id. See also, Dennis v. Tomahawk Services, Inc., 29 WH Cases 573 (Mont. Sup. Ct. 1989) (Truck dispatcher determined to be administrative exempt employee). But see, Iaria v. Metro Fuel Oil Corp., 14 WH Cases 1435 (E.D.N.Y. 2009) (Fuel oil company s 10

dispatchers held non-exempt where dispatchers duties related more directly to delivery of fuel oil for heating, which is service and product that company provides, than to performing tasks that every business must undertake in order to function). Burns v. Blackhawk Mgmt. Corp., 12 WH Cases 2d 798 (S.D. Miss. 2008) (Issue of fact regarding construction representative s job duties precluded summary judgment regarding whether employee qualified for administrative exemption. Employer described duties as involving quality control oversight over projects with virtually no supervision or oversight from superiors; employee described job as little more than a glorified tattletale involving no discretion or independent judgment because all of his activities needed to be approved by the project manager.). Villegas v. Dependable Construction Services, Inc., 14 WH Cases 2d 667 (S.D. Tex. 2008) (Issue of fact precludes summary judgment with respect to claims brought by construction superintendents who were classified as administrative exempt employees for FLSA purposes. Extent to which superintendents exercised discretion and judgment disputed, as was issue of whether superintendents were involved in production or administration.). Friou v. L.E. Coppersmith, Inc., 4 WH Cases 2d 1422 (S.D. Tex. 1998) (Office accounting manager not exempt administrative employee where her primary duty was the performance of routine clerical and bookkeeping tasks and routine telephone collections and other duties were undisputably secretarial or clerical, such as filing, answering the phone, running errands, retrieving the office mail, and making copies. ). Nelson v. Ellerbe Becket Construction Services, Inc., 9 WH Cases 2d 169 (D. Minn. 2003) (Court finds a genuine issue of material fact as to whether a senior construction accountant s primary job duties directly related to management policies or general business operations or were, instead, essentially of a clerical/bookkeeping nature.). Carpenter v. R.M. Shoemaker Co., 7 WH Cases 2d 1457 (E.D. Pa. 2002) (Summary judgment denied with respect to whether a project superintendent of a large regional construction management company was properly classified as an exempt administrative employee. Court finds that there is an issue of fact regarding whether plaintiff s duties were administrative or production oriented : Shoemaker aims to produce the effective management of construction projects for others. Viewed in this 11

manner, Plaintiff could be construed as participating on the production side, as opposed to the administrative side, of Defendant s business because he was in the field generating the service which Shoemaker manufactures, i.e., management of construction projects. ). Cowart v. Ingalls Shipbuilding, Inc., 6 WH Cases 2d 161 (5 th Cir. 2000) (Court affirms summary judgment finding that senior production planners for ship construction company were administrative exempt employees. Court finds that planners performed work that was predominantly intellectual in nature and involved little, if any, manual labor or mechanical work. Court noted that planners are responsible for planning in detail all production work requirements in the shipyard. In doing so, the planners evaluate work scope requirements, establish priorities for assigned work, and provide guidance so that work schedules can be met. Planners were responsible for planning the sequence of new construction work to be performed and for schedul[ing] the availability of materials needed to accomplish that work, all of which require[d] the use of discretion and judgment on a daily basis. ). C. The Professional Exemption (29 CFR 541.300) An employee is employed in a bona fide professional capacity if the following are present: The employee is compensated on a salary or fee basis at a rate not less than $455 per week (with certain specific exemptions); The employee s primary duty is the performance of work requiring advanced knowledge in a field of science or learning which is customarily acquired by a prolonged course of specialized intellectual instruction, or The employee s primary duty is the performance of work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor. With respect to the learned professional (as opposed to the artistic professional) the phrase customarily acquired by a prolonged course of specialized intellectual instruction restricts the exemption to employees having some type of academic degree, as opposed to skill acquired through experience. See 29 CFR 541.301(d). 12

1. Advanced Knowledge (29 CFR 541.301(b)) Predominantly intellectual in character Involves work requiring the consistent exercise of discretion and judgment The advanced knowledge is generally used to analyze, interpret, or make deductions from varying facts or circumstances Does not include routine, mental, manual, mechanical, or physical work Cannot be attained at the high school level 2. Field of Science or Learning (29 CFR 541.301(c)) Occupations with recognized professional status (e.g., engineering, law, medicine, accounting, architecture) as distinguished from the mechanical arts or skilled trades. 3. Prolonged Course of Specialized Intellectual Instruction (29 CFR 541.301(d)) Specialized academic training is a prerequisite for entering the profession Best evidence that employee meets this requirement is possession of the appropriate academic degree Exemption is not available when work may be performed with only the general knowledge acquired by an academic degree in any field, knowledge acquired through an apprenticeship, or training in the performance of routine mental, manual, mechanical, or physical processes Exemption does not apply to occupations where most employees acquire skill by experience Examples of non-exempt professionals include accounting clerks and bookkeepers who normally perform a great deal of routine work, engineering technicians, and the like 4. Construction Industry Cases Young v. Cooper Cameron Corp., 15 WH Cases 2d 941 (2 nd Cir. 2009) (Products design specialist who worked on complex hydraulic power units for oil and gas industry did not qualify as 13

exempt professional even though job involved complicated technical expertise and experience where specialist s job did not require any formal advanced education). Pignataro v. N.Y. & N.J. Port Authority, 15 WH Cases 2d 1357 (3 rd Cir. 2010) (Helicopter pilots do not qualify for professional exemption where pilots knowledge and skills are acquired through experience and supervised training as opposed to academic degree). D. Combination Exemptions (29 CFR 541.708) 1. Employees who perform a combination of exempt duties may qualify for exemption. For example, an employee whose primary duty involves a combination of exempt administrative and exempt executive work may qualify for exemption. See 29 CFR 541.708. In other words, work that is exempt under one section of this part will not defeat the exemption under any other section. Id. This provision does not, however, relieve the employer from having to independently establish the requirements of each exemption that is claimed. See, e.g., IntraComm, Inc. v. Bajaj, 492 F.3d 285, 294 (4 th Cir. 2007). E. The Highly Compensated Employee Exemption (29 CFR 541.601) 1. The employee performs office or non-manual work and is paid an annual compensation of $100,000 or more, including at least $455 per week on a salary or fee basis. 2. The employee customarily and regularly performs at least one of the exempt duties or responsibilities of an exempt executive, administrative, or professional employee identified in the standard tests for exemption. Note: This rule was meant to be a shortcut to figuring out if an employee is exempt, rather than a new exemption. II. SALARY BASIS TEST (29 CFR 541.600 et seq.) B. Generally 1. The Department of Labor regulations provide that an employee will be considered to be paid on a salary basis within the meaning of the regulations if under his employment agreement he regularly receives each pay period on a weekly, or less frequent basis, a predetermined amount constituting all or part of his compensation, which amount is not subject to reduction because of variations in the quality or quantity of the work performed. 29 CFR 541.602(a). 14

2. In addition, the regulations provide that the employee must receive his full salary for any week in which he performs any work without regard to the number of days or hours worked. 29 CFR 541.602(a). 3. Accordingly, if a salaried employee is ready, willing, and able to work, deductions may not be made for time when work is not available. 29 CFR 541.118(b) (the regulations do explicitly provide that an employee need not be paid for any workweek in which he performs no work. 29 CFR 541.602(a)). Martin v. W.E. Monks & Co., 1 WH Cases 2d 36 (S.D. Ohio 1992) (Consulting engineering firm not entitled to claim professional exemption for 13 draftsmen, designers, and engineers where, regardless of whether they otherwise would have qualified as professional employees on the basis of their job duties, Defendant s pay plan was such that Plaintiffs were not paid on a salary basis. ). C. Permissible Deductions 1. The Department of Labor regulations do permit employers to make certain deductions from a white collar employee s salary which will not destroy the employee s exempt status. 29 CFR 541.602. 2. Initial and Terminal weeks of employment: The regulations permit an employer to pay a salaried employee a proportionate part of the employee s salary for the time actually worked in the initial and terminal weeks of employment. 29 CFR 541.602(b)(6). 3. An employer may also permissibly deduct from a salaried employee s salary if the employee is absent for one or more full days for personal reasons, other than sickness or disability. 29 CFR 602(b)(1). 4. An employer may permissibly deduct from a salaried employee s salary for absences of a day or more due to sickness or disability provided the employer has a bona fide sick or disability pay plan. 29 CFR 541.602(b)(2). 5. An employer may permissibly deduct from a salaried employee s salary for absences taken pursuant to the Family and Medical Leave Act. 29 CFR 541.602(b)(7). 6. An employer may permissibly deduct from a salaried employee s salary for absences due to violations of safety rules of major significance. 29 CFR 541.602(b)(4). 15

7. Deductions may be made for unpaid disciplinary suspensions of one or more full days imposed in good faith for infractions of workplace conduct rules. Such suspensions must be imposed pursuant to written policy applicable to all employees. 29 CFR 541.602(b)(5). D. Impermissible Deductions 1. The regulations do not permit an employer to deduct from a salaried employee s salary if the employee is absent from work, for less than a one week period, due to jury duty, attendance as a witness, or temporary military leave. An employer may, however, offset any amounts received by an employee as jury or witness fees or military pay for a particular week against the salary due for that particular week without loss of the exemption status. 29 CFR 541.602(b)(3). 2. Employers are not permitted to make deductions from a salaried employee s salary for absences of less than a full day. See, e.g., 29 CFR 541.602(b)(1)(2)(5). 3. Employers may not make deductions from a salaried employee s salary for absences of less than a full workweek which are caused by the employer or the operating requirements of the business. 29 CFR 541.602(a). E. Additions To Salary 1. According to the Department of Labor Regulations, in certain circumstances, employers may pay exempt employees additional compensation along with a predetermined amount each pay period without automatically losing the employee s salaried status. 29 CFR 541.604. F. Safe Harbor (29 CFR 541.603) Exempt status will not be lost if the employer takes advantage of the safe harbor provisions. Exemption will not be lost if employer: 1. Has a clearly communicated policy prohibiting improper deductions AND a complaint mechanism; 2. Reimburses employees for any improper deductions; and 3. Makes a good faith commitment to comply in future. 16

III. GUIDELINES FOR DEALING WITH OVERTIME LAWS 1. Identify those employees who earn less than $455 per week ($23,660 annually) and evaluate whether they meet any of the duties tests. If they otherwise meet the exemption standards, consider whether increasing their compensation to preserve exempt status is available option or, if they do not meet any duties test, adjust practices to provide overtime compensation or strictly adhere to a 40-hour work week. 2. Evaluate, on a regular and periodic basis, the job duties of your workforce to determine whether employees are properly classified. Where necessary, revise or update job descriptions. Pay close attention to the classification of employees who, under the prior regulations, were difficult to classify. The revised regulations may tip a close analysis the other way. 3. Consider employee retention and morale issues before changing the status of a large group of employees. 4. Evaluate payroll, attendance, timekeeping, compensation, and discipline policies and practices for compliance with the salary basis requirements. Have a policy in place for reporting and correcting mistakes. Both policies and actual practices are important in evaluating whether an employer properly compensates employees on a salary basis and whether the safe harbor for deductions may apply. 5. If substantial changes to exempt status and/or company practices are required, develop a comprehensive communication strategy for explaining the changes to the workforce. Clear communication with employees about any changes, the reasons for the changes, and their practical impact will help counter any misinformation and maintain employee morale. 6. Remember that any applicable collective bargaining agreement and state and local wage and hour laws still apply. Nothing in the Fair Labor Standards Act regulations relieves an employer from these parallel obligations. 17