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August 2016

White-Collar Exemptions and the Impact on Construction

The new overtime regulations that were recently enacted not only mandate that employees earning less than $913 per week or $47,476 per year are due overtime, but it can also spell trouble for contractors and subcontractors paying those wages. While employees can be classified as exempt for any amounts over this threshold, unfortunately, the new overtime regulations failed to clarify the old “white-collar” exemption tests, leaving many questions unanswered for employers.

Historically, the white-collar exemptions have cost companies both in and out of the construction field millions in litigation costs and unpaid overtime. This article explains the two most utilized exemptions and illustrates an example of exposure contractors tend to see in their industry. The language of the exemptions starts simply enough:

  1. Executive Exemption – to qualify for the executive exemption an employee’s job must meet the following requirements: 1.) the primary duty must relate to managing the business or one of its departments or subdivisions, 2.) the employee must regularly supervise or direct the work at least two full-time employees (or equivalent part-time employees), and 3.) the employee must have the authority to hire or fire employees, or the employees recommendations must carry a ‘particular’ weight with such topics.
  2. Administrative Exemption: 1.) the primary duty must be performing office or other non-manual work that directly relates to the management or business operations of the employer, and 2.) the employee’s primary duty must include the exercise of discretion and independent judgment with respect to significant matters.

But while these exemptions seem straightforward, they rest at the heart of some of the largest class and collective action settlements of the past two decades. An employer, regardless of size, cannot completely guard against being sued, but there are a few protocols it can implement to drastically reduce exposure to liability under the FLSA.

First, identify who may be exempt. With the new salary bump, any employee earning below $47,476 gets overtime. After that, each exemption requires a clear understanding of what the employee actually does (the “primary duty”). It may seem silly, but an employee plaintiff may have quite a different idea of his or her role within the business than the business does. For instance, in Bothell v. Phase Metrics, Inc., the employer asserted that the employee’s job included supervising the installation, repair, and maintenance of the defendant's equipment. 299 F.3d 1120, 1123 (9th Cir. 2002.) Thus, according to the employer, the employee met the administrative exemption and should not receive overtime. In contrast, the employee stated that his primary duty was actually "install, troubleshoot, and maintain" the defendant's equipment.

This slight difference on paper translated to the employee winning an appeal in the Ninth Circuit Court of Appeals. The Appellate Court ruled that the case should go to trial to determine exactly what the employee’s primary duties. This meant that the employer, rather than walking away victorious on a motion to dismiss, suddenly found itself exposed to: (1) potential unpaid overtime for up to three years prior to the filing of the lawsuit; (2) attorneys fees for its own trial preparation; and (3) potential attorneys’ fees for the Plaintiff. Very quickly, a $30,000 case turned into a $200,000 case.

Also related to this issue are project managers, who by their title and general duties are often classified as exempt by their employers. Often, project managers on a job site supervise employees of subcontractors and not their company’s employees. While the duties may meet the exemption, the technicality of employee versus subcontractor supervision can mean the project manager does not actually qualify for an overtime exemption. This is an example of how the law in this area frequently does not make common sense and includes several traps for employers in the construction business. As an employer, we encourage you to seek the guidance of experienced counsel to audit all pay policies and practices. The benefits of a preemptive internal review can far exceed the liability from a failure to do so.


Chad A. Shultz

Employment Law