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Construction Labor Costs May Rise With New DOL Rule

On May 18, 2016, President Obama announced the publication of the Department of Labor’s (DOL) final rule regarding overtime regulations.

The new rule, which takes effect Dec. 1, 2016, increases the standard salary level from $455 per week ($23,660 per year) to $913 per week ($47,476 per year), and the total compensation requirement is raised from $100,000 to $134,004 per year. The new rule also includes a provision for future automatic updates beginning Jan. 1, 2020.

What does this mean for the construction industry? Initially, it means that anyone making less than $913 per week will be entitled to receive, and must be paid, overtime pay for all work in excess of 40 hours per week. In North Carolina, overtime is calculated at time and a half for all time worked over 40 hours per week. This may vary from state to state. For construction-related businesses, which are behind only the agriculture and the hospitality industries as having the most affected workers, it means that approximately 32.6 percent of workers will be entitled to overtime pay under the new rule.

To that end, contractors and other construction industry employers will have some decisions to make. Should the employer:

  1. simply pay the overtime worked by their employees;
  2. limit workweeks to no more than 40 hours with no overtime; or
  3. give the employee a raise just above the standard income level, thus making the employee exempt (if the employee’s pay rate is already close to the new standard compensation requirement)?

Moreover, industry executives will need to decide how to adjust estimating, bidding and billing to reflect the changes in labor costs. Regardless of the choices made to the compensation of employees, the new rule will cost employers more to cover the added bureaucratic burden of determining which employees are exempt.

The first step should be to conduct a cost-benefit analysis of pay, average overtime previously worked, and/or any expected upcoming overtime for all employees. Next, in consultation with an attorney or accountant, the employer should decide whether paying overtime, enforcing work limits or giving specific employees raises is the most appropriate course of action.

Classification of employees as exempt or non-exempt is a critical step in this process. Unless the company has qualified human resources personnel, business owners and executives should consult an accountant or attorney for assistance. Once the initial determination is made, it will need to be revisited again with each pay increase the employee receives, as well as each time the DOL modifies the standard salary level.

Worthy of special consideration are some of the most visible people on any construction project: superintendents. Most construction superintendents are paid a salary and are not paid overtime. Under the new rule, a construction superintendent will usually be an exempt employee if he or she is paid $134,004 a year or more, or qualifies as an “administrative” employee. An “administrative” employee is one who is paid more than $913 per week, and whose job description is that of office or non-manual labor related to the business of the general contractor. This person also should have the ability to exercise independent judgment and have discretion in “significant” matters. The employer has the burden of proving to the DOL whether the construction superintendent is exempt from overtime pay. Again, consultation with an attorney, accountant or human resources professional is important in making this type of assessment.

In addition, employers need to consider travel time of their employees. Workers that incur a lot of travel time to and from jobsites can easily exceed a 40-hour workweek. It may be more beneficial to give these employees raises than to pay them overtime for travel.

Note, the Fair Labor Standards Act (FLSA) requires that records addressing wage computations for each employee be retained for at least two years. To aid with recordkeeping, it may be better to compensate some currently salaried employees, with a set daily schedule, at an equivalent hourly rate eligible for overtime pay. This shift may come with resistance. Employees who have been paid on a salary basis may struggle with keeping a daily account of their hours on the job or using a time clock.

Two other areas that often cause problems for employers are failure to maintain records on non-exempt salaried employees and granting compensatory time off in lieu of overtime pay. It is important to note that the rule identifies the compensation period as one week, not as a pay period. Therefore, working fewer than 40 hours in one week of a pay period does not offset overtime incurred during the other week(s).

So what happens if an employer fails to correctly classify employees, maintain records or pay overtime? Under the FSLA, “any employer” that violates minimum wage or unpaid overtime compensation laws may be liable for both the shortfall and liquidated damages, which means double the damages. In some cases, employers have even been jailed.

All employers should take time over the remaining months of 2016 to contact an attorney, accountant, or human resources professional and jointly review current and previous employee compensation records. Then make decisions on any compensation changes, as well as establish an evaluation, recordkeeping and reporting plan before the new rule takes effect Dec. 1.

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