Many employers are under the common misconception that simply paying an employee on “salary” means they are exempt from the overtime requirements pursuant to federal, state, or local laws. However, there are many considerations for determining exempt status, including not only whether the employee is paid on a salary basis as defined by applicable law, but also the job duties that the employee performs. If each element of the exempt status analysis is not satisfied, then the employee is not exempt from receiving the overtime premium.

Confirming that employees are properly classified as exempt from overtime and taking proactive steps to ensure compliance with applicable wage and hour laws are key steps to avoiding the many risks of wage and hour litigation. In 2022 alone, the U.S. Department of Labor (DOL) recovered $32,913,795 in back wages for 17,127 employees in the construction industry.

This article discusses common exemptions in construction and other wage and hour issues to provide a foundation for employers to take proactive steps for minimizing the risk of facing a lawsuit and/or incurring damages following an investigation by the DOL or similar state-based department. The exemptions discussed in this article generally do not apply to employees covered by a collective bargaining agreement but may apply in narrow situations. Even so, it is important to remember that collective bargaining agreements cannot waive or reduce wage and hour protections, such as those set forth in the Fair Labor Standards Act (FLSA).¹

Fair Labor Standards Act

The FLSA is the federal law that requires employers to pay most employees at least the federal minimum wage for all hours worked, including overtime (time and a half of the regular rate of pay),  for all hours worked over 40 in a given work week.

The FLSA also provides exemptions from overtime requirements; the most commonly disputed exemptions in the construction industry are the executive and administrative exemptions. However, employers that improperly classify employees as exempt are at risk of facing legal claims under the FLSA and a variety of other state and local counterpart laws.

Cases in the construction industry involving misclassification of employees as exempt (or as independent contractors) are on the rise, and many states have increased penalties for employers that violate these laws. As such, employers that misclassify employees as exempt are not only at risk of paying years of alleged unpaid compensation (usually overtime) but are also subject to a variety of often severe penalties. Under the FLSA, employees can recover up to three years of back wages and an equal amount of liquidated damages for any unpaid overtime. Further, it is common that FLSA claims are brought in conjunction with a state claim and for the penalties (under the state law claim) to exceed the amount of the alleged unpaid wages.

While a two-year statute of limitations generally applies under the FLSA, it can extend to three years in cases where a willful violation is alleged and proven, meaning the employer knew it was violating the FLSA or showed reckless disregard for whether its conduct was prohibited by the FLSA. In addition, some states have longer statutes of limitation — for example, Florida allows employees to recover unpaid wages up to five years in the past (F.S. §95.11(2)(d)).

Example

To fully understand how the potential monetary damages can quickly multiply beyond any alleged unpaid wages, here is an example:

Construction Employer A — located and performing work in Illinois — improperly classified inspector Jane Doe as exempt from overtime requirements under the FLSA and the Illinois Minimum Wage Law.

After being terminated for violation of company policy, Jane brought a claim against Construction Employer A for the last three years of uncompensated overtime allegedly totaling $10,000.

Exhibit 1 includes a non-exhaustive list of penalties that Construction Employer A may be subject to under Federal and Illinois law, should Jane prevail on her claims. As shown in this example, misclassifying even one employee and failing to pay even the smallest amount of overtime can have an enormous financial impact on a business.

Additionally, wage and hour cases (e.g., Rossman v. EN Eng’g, LLC, 19-CV-05768, 2020 WL 5253861 (N.D. Ill. Sept. 3, 2020)) are often brought as class and collective actions, grouping similarly situated employees in a single action, which multiplies potential damages.

While most employers think of the monetary risk involved in misclassifying employees as exempt, there are other potential risks including, but not limited to, time and effort spent on defending claims, low employee morale, and damage to reputation as litigation is public.

Overview of Exempt & Non-Exempt Status

The FLSA exempts certain categories of employees from its overtime requirements. There are five main categories of exemptions: administrative, executive, professional, computer employee, and outside sales.

This article focuses on the administrative and executive exemptions, which are common (and the most likely to be disputed) in the construction industry (Exhibit 2).

Employer Coverage

The FLSA provisions do not apply to all employees, as there are several threshold requirements that must first be satisfied.

As a summary, an employee must establish that they work for an employer that is an enterprise engaged in commerce (enterprise coverage) or that the employee is personally engaged in interstate commerce on behalf of the employer (individual coverage).

Enterprise Coverage

An enterprise engaged in commerce includes employers that have:

• “Employees engaged in commerce or in the production of goods for commerce, or employees handling, selling, or otherwise working on goods or materials that have been moved in or produced for commerce by any person”
• At least two employees
• An annual dollar volume of sales or business done of at least $500,000

If an employer does not fall under enterprise coverage, then employees may still be entitled to FLSA protections if they are individually engaged in interstate commerce on behalf of the employer.

Individual Coverage

Individual coverage covers employees who directly and regularly engage in “commerce or in the production of goods for commerce.”

FLSA coverage (e.g., Fact Sheet #14: Coverage Under the Fair Labor Standards Act (FLSA) and Fact Sheet #27: New Businesses Under The Fair Labor Standards Act (FLSA)) is often interpreted broadly (noting, for example, that even processing credit card transactions can be considered as engaging in interstate commerce for purposes of individual coverage).

According to the regulations interpreting the FLSA (29 CFR §779.103), construction employees are often individually covered by the FLSA, as they engage in interstate commerce or in the production of goods for interstate commerce, which is defined broadly under the FLSA.

For example, the DOL published guidance regarding FLSA coverage for construction activities stating that the FLSA “covers construction work which is closely tied with the process of producing goods for interstate commerce” including, but not limited to:

• “Repair, maintenance, and construction of interstate commerce including railroads, highways and city streets, pipe lines, telephone and/or electrical transmission lines, airports, bus/truck/steamship terminals, radio or TV stations and rivers/streams/waterways over which interstate or foreign commerce regularly moves”
• “Repair, maintenance, reconstruction, redesign, improvement or extension or enlargement of an existing facility engaged in the production of goods for interstate commerce”

Salary Basis Threshold

To qualify for an administrative, executive, or professional exemption under the FLSA, employers must pay employees a salary of $684 or more per week. This amount may be higher under state law. While the DOL has not provided specific details, it is likely that this threshold salary requirement under federal law will increase in 2024 or shortly thereafter.

Even if an employee is paid on a salary basis and performs duties that are considered exempt duties within the definition of the administrative exemption, if they are paid less than a salary of $684 per week (or paid on an hourly basis), then the employee does not satisfy the administrative exemption requirements and would be entitled to overtime.

To be paid on a salary basis not only means that the employee receives at least the guaranteed minimum salary each week, but also that the employer does not take any improper deductions from the employee’s salary.

There are very narrow instances in which an employer can take a deduction from an exempt employee’s salary. For a non-exhaustive example, while benefit deductions such as for 401k contributions or health insurance premiums can be deducted as directed by the employee, employers cannot deduct from exempt employee pay for long meal breaks, partial day absences, jury duty (but may offset any amount received in jury or witness fees), and failure to meet business deadlines (29 CFR §541.602(b)).

Employers that take improper deductions from an employee’s salary risk losing exempt status. For example, in Folta v. Norfork Brewing Co., a court in Arkansas granted summary judgment for the plaintiff (employee) finding that the employer did not satisfy the exempt status requirements because it did not compensate the employee on a guaranteed salary basis during his entire employment where the salary payments varied over time, and in one instance, the employee’s salary was docked due to a violation of company policy.

Safe Harbor Policy

An important tool to help mitigate risk under the FLSA regarding exempt status misclassification is establishing a safe harbor policy. In some instances, a safe harbor policy (29 CFR §541.603(d)) may help mitigate risk where an employer made an improper deduction, if the employer adopts a policy that:

• Clearly communicates the employer’s prohibition of improper salary deductions;
• Includes a procedure whereby an employee may file a complaint regarding an improper deduction;
• Reimburses employees for improper deductions;
• Makes a good faith commitment to comply; and
• Does not willfully violate the policy by continuing to make improper deductions after complaints are made.