Staying fair

Imagine this scenario: John Doe worked for you for two months. He claimed he worked 49 hours during one week, but you only paid him for 40 hours because you determined he was not eligible for overtime. During his first 60 days, John had six unexcused absences, but he had a family and car problems, so you gave him several breaks. After the sixth occurrence, though, you fired him.

Two weeks later, your company gets served with a lawsuit naming John as the plaintiff as well as other employees “similarly situated.” John’s attorney filed a motion for conditional certification, which was granted, and he now is permitted to send notices to other employees who worked for your company during the past three years to see whether they want to “opt in” to the lawsuit. About 150 notices are sent, and 45 employees choose to opt in.

The lawsuit names your company and you, the company’s president, as defendants. Now, instead of fighting about nine hours of overtime alleged by John Doe, which you were determined not to pay, you are battling a federal lawsuit against 46 current and former employees. You are paying your attorney to defend a lawsuit against these 46 employees, each of whom estimates he or she worked 10 hours of unpaid overtime per week. They also assert entitlement to double the amount of lost wages as liquidated damages plus their attorneys’ fees.

Worse yet, the 46 employees likely will be entitled to their attorneys’ fees if they can show any unpaid overtime, but your company, in all likelihood, will not recover your attorneys’ fees even if your company wins the lawsuit. The scenario quickly went from a lawsuit about a few hundred dollars of overtime pay to one that has the potential to sink your company.

Did this scenario get your attention? It should. The following Fair Labor Standards Act wage and hour compliance issues are confronted by roofing contractors every day. Knowing these issues will help you identify ways to mitigate your company’s exposure if a Department of Labor investigator or process server comes knocking.

Misclassification

One error frequented by roofing contractors is misclassifying “nonexempt” employees as “exempt.” An employee classified as “exempt” usually is paid a salary and no overtime. An employee classified as “nonexempt,” on the other hand, is paid hourly and is entitled to overtime pay if he or she works more than 40 hours during a given workweek. The FLSA creates a general presumption that all employees are entitled to minimum wage and overtime unless the employer can show an employee meets an exception to the FLSA.

Because you pay certain employees a salary, you may believe you do not need to pay them overtime. However, paying a salary is not enough to establish an FLSA exemption. You must pay exempt employees a requisite salary and those employees must fit into one of several FLSA exempt categories.

Section 13(a)(1) of the FLSA provides an exemption from both minimum wage and overtime pay for employees employed as bona fide executive, administrative, professional and outside sales employees. The executive, administrative and outside sales exemptions are the ones that most often apply to roofing contractors, so let’s review each one.

Executive exemption

To qualify for the executive employee exemption, each of the following must be true:

• The employee must be compensated on a salary basis (as defined in the regulations) and paid at least $684 per week.
• The employee’s primary duty must be managing the enterprise or managing a customarily recognized department or subdivision of the enterprise.
• The employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent.
• The employee must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight.

Administrative exemption

To qualify for the administrative employee exemption, each of the following must be true:

• The employee must be compensated on a salary or fee basis (as defined in the regulations) and paid at least $684 per week.
• The employee’s primary duty must be the performance of office or nonmanual work directly related to the management or general business operations of the employer or the employer’s customers.
• The employee’s primary duty must include the exercise of discretion and independent judgment with respect to matters of significance.

Outside sales exemption

To qualify for the outside sales employee exemption, each of the following must be true:

• The employee’s primary duty must be making sales (as defined in the FLSA) or obtaining orders or contracts for services or facility use that will be paid by the client or customer.
• The employee must be customarily and regularly engaged away from the employer’s place or places of business.

If your salary employees do not fall precisely into one of these exemptions (absent them falling into a more obscure exemption not listed), they are not exempt. This typically means you would convert them to hourly employees or modify their job responsibilities so they fit into one of the exemptions. If you do not, you and your company are exposed. Any employee who is not ultimately determined to be exempt can seek minimum wage and overtime for all the weeks in which he or she was improperly characterized as exempt.

Independent contractors

The FLSA only applies to employees. Independent contractors do not need to be paid minimum wage or overtime under the FLSA. For instance, if you have a crew of two employees and 18 independent contractors, you may believe you have no responsibility for paying overtime to the independent contractors because you have signed independent contractor agreements. But that is not necessarily true.

The IRS, as well as just about every state, has a multifactor test for determining who is an employee versus who is an independent contractor. Although the IRS and various state tests come in different iterations, the general rule is an independent contractor must control how the work gets done.

According to the IRS, the following three things determine whether a worker is an employee or an independent contractor:

Behavioral control

A worker is an employee when the business has the right to direct and control the work performed by the worker even if that right is not exercised. Behavioral control categories are:

• Instructions given such as when and where to work, what tools to use, or where to purchase supplies and services. Receiving these types of instructions from you may indicate a worker is an employee.
• Degree of instruction that involves providing detailed guidance. Less detailed instructions reflect less control, indicating a worker is more likely an independent contractor.
• Evaluation systems that measure the details of how the work is done points to employee status. Evaluation systems measuring only the end result could suggest independent contractor status.
• Training a worker how to do a job—or training a worker about procedures and methods—is strong evidence the worker is an employee and not an independent contractor. Independent contractors typically use their own methods.

Financial control

When determining whether a worker is an independent contractor or an employee, consider the following aspects of financial control:

• Significant investment in equipment a worker uses while working for you is an indicator of an employment relationship.
• Independent contractors are more likely to incur unreimbursed expenses than employees.
• Opportunity for profit or loss often is reflective of an independent contractor.
• Independent contractors are generally free to seek out business opportunities outside of your employ.
• An employee typically is guaranteed a regular wage amount for an hourly, weekly or other period of time even when supplemented by a commission. However, independent contractors most often are paid a flat fee after job completion.

Relationship

The type of relationship depends on how a worker and you perceive your interactions. This includes:

• Written contracts that describe the relationship the parties intend to create. However, a contract alone stating the worker is an employee or an independent contractor is not sufficient to determine the worker’s status.
• Businesses provide benefits such as insurance, pension plan, vacation pay or sick pay to employees and not independent contractors.
• An expectation the relationship will continue indefinitely rather than for a specific project or period generally signals the intent to create an employer-employee relationship.
• Services provided are a key activity of your business, and the extent to which such services are performed by a worker is seen as a key aspect as to whether the worker is considered an employee.

Quite frequently, workers who you consider to be independent contractors are ultimately construed by the IRS, the department of revenue or courts to be employees.

This means an employee can claim, and is entitled to, all the overtime he or she can reasonably establish. The employee classification has several other potential implications such as workers’ compensation insurance, applicability of other employment laws and payroll taxes.

As an employer, you should undertake an assessment of any employee versus independent contractor determinations. If you believe a worker may be improperly classified, options include, but are not limited to, accepting the risk; reclassifying 1099 workers as W-2 employees; and if you are in a “joint employer” situation, such as using a third party to provide workers for you, consider adding an indemnification or hold harmless provision to the agreement with the third party that could apply in the event a worker raises a claim predicated on employee status.

Work conducted during breaks

If your workers take unpaid lunch breaks and you automatically deduct that time from their paychecks, a DOL investigator will notice. Then, the investigator is going to interview some of your employees and ask whether they always take a full lunch. Employees are inevitably going to say “not always.” Herein lies the rub.

No work should be conducted during an unpaid break. Compensate employees for any period in which work is performed. If possible, require employees to clock in and out for lunch as opposed to deducting automatically. If a supervisor or foreman is keeping track of employees’ hours, make sure he or she received FLSA training.

Lastly, make sure you have a written policy outlining what employees should do if they notice any errors in their pay. For any reports of pay errors, investigate the reports and fix the errors immediately. The policy should address any improper deductions, as well.

Inaccurate piece-rate records

Under a piece-rate system, employees are paid based on the number of units, or pieces, they complete rather than the number of hours they work. Although this is an entirely permissible way to pay employees and is common in the roofing industry, it is not a cure-all.

Employees paid on a piece-rate basis are not exempt from various FLSA requirements, including minimum wage, overtime and record-keeping obligations. This may be surprising because the time it takes an employee to complete a task is not relevant. Generally, this is a true statement as long as the employee does not work more than 40 hours during a workweek and the employee’s total compensation for the week averages at least the applicable minimum wage.

However, even assuming these standards are satisfied, it still is essential for employers to maintain accurate daily and weekly time records for employees paid on a piece‑rate basis. Otherwise, you have no way to prove the minimum wage and overtime pay requirements have been properly satisfied.

I recommend you keep daily and weekly time records for your employees even if you are using a piece-rate system. Otherwise, you are likely to run across a situation now or sometime in the future when an employee claims he or she worked more hours in a week than he or she actually did in an attempt to substantiate a claim he or she was not paid at least minimum wage for each hour worked.

Calculating overtime for piece-rate employees

To calculate overtime properly, first determine the employee’s effective hourly rate for the workweek based on the number of hours worked. Note the piece rate is not the regular rate of pay. For a piece-rate employee, the regular rate of pay is calculated by taking the total compensation for the week (piece‑rate compensation and any bonuses or commissions) and dividing it by the total number of hours worked. If the employee worked 45 hours during a workweek, installed 45 roof “pieces” and earned $450, the employee’s effective regular rate of pay for that workweek was $10 per hour. Sometimes, this is referred to as “straight time” pay.

Next, you must determine the additional overtime compensation due. The key to remember is (in the example) the employee already received straight-time pay of $10 per hour for each hour worked, including overtime hours. Therefore, the employee is entitled to receive only an additional one-half of the employee’s regular rate of pay (not a full one and one-half) for all hours worked in excess of 40.

In the example, the employee worked 45 hours and had five hours of overtime. Because the employee already received $10 per hour for all 45 hours, the employee is entitled to only an additional $5 (half of the employee’s regular rate of pay) for each of the five hours of overtime. Therefore, for the week, the employee should receive overtime compensation of $25 in addition to the $450 received as straight-time compensation for a total of $475.

There is another, perhaps less complicated, way to pay overtime compensation when using a piece‑rate system. However, the employee must agree to this method before any work is performed, so be sure to get the agreement in writing. If you and the employee agree beforehand, you may pay the employee 1½ times the employee’s regular piece‑rate pay for all pieces completed during overtime hours. Of course, the minimum wage requirements are still present, meaning the employee must receive at least the equivalent of 1½ times the minimum wage per hour for each hour of overtime.

Work, wait or travel time

Failing to properly compensate for work, waiting and travel time is another common challenge for roofing contractors.

All work suffered or permitted to be performed is work time that must be paid. For example, an employee may voluntarily continue to work at the end of a shift to finish an assigned task. The reason is immaterial. The hours are work time, and they are compensable.

Whether waiting time is considered hours worked under the FLSA depends upon the circumstances. Generally, the facts may show an employee was “engaged to wait,” which is work time. For example, say an employee was required to be at work at 6 a.m. at which point he or she loads the truck before going to the job site. This is considered work time. But if the employee arrived at the job site before his or her usual start time and merely waited for his or her shift to begin, this is not considered work time.

An employee who travels from home to the office or work site (as long as the work site is within a reasonable range that would be considered an ordinary commute) before the regular workday begins and returns to his or her home at the end of the workday is engaged in ordinary home-to-work travel, which is not work time. But be careful about this. If an employee travels to a job site from home but at the end of the day he or she is required to go to the office to attend a meeting or return supplies, he or she is entitled to be paid for the travel time to the office (and for the meeting).

For employees who regularly work at a fixed location in one city and are given a special one-day assignment in another city but return home the same day, the time spent traveling to and returning from the other city is work time.

Time spent by an employee traveling as part of his or her principal activity, such as traveling from job site to job site during the workday, is work time and must be counted as hours worked.

Takeaways

The FLSA, its regulations and complexities go well beyond what has been addressed in this article, but I’ve listed some of the most common challenges for roofing contractors. Take a serious look at your payroll policies and practices. Conduct a payroll audit or consider engaging a third party to conduct one for you. Make sure your workers are properly classified as independent contractors versus employees, and look at whether you are properly handling lunch breaks and your piece-rate system.

Be sure to engage competent employment counsel who has expertise in wage and hour law to guide you along the way, not just with audits but also with reviewing and revising policies and procedures, and for advice regarding day-to-day wage and hour issues. Taking these steps will help you cinch up your risk.

Richard V. Blystone is a partner with Cotney Construction Law LLP, Tampa, Fla.

For an article related to this topic, see “A slippery slope.”