Are Your Clients Prepared For A Visit from the Department Of Labor?

Last year, the United States Department of Labor ("DOL") officially began an audit of the construction industry which the department hopes will be as successful as its attack on the garment industry was. Construction projects in and around Harris County are the testing grounds for this ambitious five-year project. Depending upon success and budget, the project will shortly expand across Texas. The Wage and Hour Division of the DOL fired its opening volley in this campaign by visiting Harris County construction sites in October, 1998 and targeting roofing subcontractors, in particular.⁽¹⁾ This paper will discuss the expressed goals and methods of DOL auditors, as well as the questions construction companies may face when defending against an audit.

Audits Stemming from Complaints

Your contractor client will be better able to survive a DOL audit when armed with a thorough understanding of the auditors' motivation, as well as audit procedure. Normally, DOL audits are a result of a specific complaint made against a company by an employee or competitor. Under those circumstances, the auditor is looking for the reported infractions, and may be satisfied that the complaint was unfounded if wage records appear to be in order and the allegations do not appear, on the surface, to be supported. After all, the DOL is accustomed to receiving complaints from disgruntled former employees or competitors, and the auditors understand that the motives behind some complaints are not always pure.

On the other hand, if the audit reveals poor or incomplete records, or the auditor immediately notes a wage violation of some sort, the auditor may well assume that the employer is engaged in some sort of illegal compensatory scheme, and that impression will be difficult to overcome. As a general rule, accurate records are among the best defenses to this type of audit, because the auditor's initial impression is crucial. Recordkeeping is discussed in a later section of this paper.

The DOL has been criticized in the past for the results of its complaint-based investigations because: (1) the department could only respond to random samplings of complaints, given the volume of reports, and (2) critics felt that the department's collection of back wages was ineffectual, and that illegal employment practices were not being dissuaded. According to the Wage and Hour Division of the Houston office, the DOL in recent years is enjoying more success through industry targeting. If your client receives a DOL visit as part of an industry targeting program such as the one currently aimed at construction companies, the rules are somewhat different from a complaint investigation.

Industry Audits

The DOL has targeted the construction industry, and construction subcontractors in particular, and the resulting DOL audits are being conducted with an eye toward reforming that industry. The DOL believes (with some justification) that most wage and hour and other federal violations are occurring at the subcontractor or supplier level more frequently than at the general contractor level. The DOL is seeking a way to impact those employers by exerting pressure on the companies with which they contract.

When the DOL audited the garment industry, it's main target was clothing manufacturers and their suppliers, not retail sellers of clothing. You may recall reading horrific stories of "sweat shops" and child labor violations uncovered by the DOL during that audit, and the department's success in shutting down shipments and sales of large retail chains such as Wal-Mart as a result. The DOL believed that pursuing the actual offender was not likely to have a long-term effect, as many of those companies were transient or insolvent, and the flow of goods would not be adequately impacted. The DOL therefore sought a way to exert pressure on the manufacturer transporting the goods, and on the retailer, and found its weapon through the interstate commerce clause, and sale of "hot" goods.

Companies could be barred from shipping and from selling goods received through interstate commerce, if those goods were created in violation of the Fair Labor Standards Act, 29 U.S.C. 201, et. seq. ("FLSA"). The DOL also successfully used the press to expose the problems it uncovered, and to place the manufacturers and retailers in the spotlight. Whether or not the company knew (or claimed to know) about the goods being produced by underpaid workers was irrelevant. This strategy proved enormously successful for the DOL, and the department has announced that it is looking to achieve a similar success in the construction industry. Clothing manufacturers and retailers began to police the companies who produced the clothing, and the DOL similarly now wants to force general contractors to police its subcontractors' employment practices.

The DOL's Strategy for the Construction Industry

Attached to this paper as Exhibit "A" is a copy of an article printed in the Houston Chronicle on July 18, 1998. The article outlines the DOL's objectives in the construction market fairly accurately, and notes that the DOL's strategy for the construction industry will be to argue that contractors and subcontractors enjoy a co-employer relationship. In other words, the DOL will seek to hold general contractors liable for FLSA violations of its subcontractors.

While general contractors on federal projects have always faced this possibility because of the requirements of the Davis-Bacon Act,⁽²⁾ the DOL has never before tried to impose such liability or penalties on general contractors on non-federal jobs. Indeed, no statute nor precedent warrants such liability, and the DOL auditors admit as much. This strategy, however, represents the DOL's attempt to exert the same sort of pressure in the construction industry as it did in the garment industry. The DOL believes that if the company at the top of the food chain on a construction project is exposed to monetary risk or negative press, that company will police its subcontractors and ensure their compliance with the FLSA. The following section describes the standard that the DOL is applying to attempt to impose liability on the general contractor.

For purposes of the construction industry audit, the DOL is using the term "independent contractor" interchangeably with "subcontractor." Historically, one of the most popular tactics utilized by employers for avoiding overtime requirements was to designate individuals who were actually employees as independent contractors. The FLSA was enacted to protect employees from substandard wage abuse and excessive hours that Congress found to be rampant and detrimental to the national well-being and free flow of commerce. Obviously, the FLSA provisions on minimum wage, overtime, equal pay, and child labor apply only to "employees." Independent contractors are not covered.

The FLSA defines the term "employee" broadly and, not surprisingly, unhelpfully. See 29 U.S.C. § 203(d). For purposes of the FLSA, an employee is defined as "any individual employed by an employer." As that definition is particularly unenlightening, the FLSA further defines the verb "employ" expansively to mean "suffer or permit to work."

In today's highly mobile employment market, many employers rely more and more heavily on independent contractors rather than on employees. Some employers do this specifically to avoid falling within the many federal and state guidelines applied to employees. Consequently, the government takes a very strict view when it seeks to determine whether a worker is an employee or an independent contractor. The DOL applied this narrow test in the garment industry to hold manufacturers liable for wage violations of its "subcontract" sewers if it found that these individuals were truly acting as employees. Manufacturers were found to be joint employers under DOL guidelines. Through the same standard, the DOL now seeks to prove that employees of a subcontractor on a construction project are functioning as employees of the general contractor as well. A copy of the DOL interpretive bulletin regarding joint employment is attached hereto as Exhibit "B."

The DOL has real no precedent for applying this standard to different contractors on a construction project, but they nevertheless have begun to hold general contractors in Houston liable for wage violations of their subcontractors (so far, the target has been roofing subcontractors). As general contractors pay the back wages assessed against their subcontractors, however, new precedent begins to emerge. On January 20, 1999, the Director of Enforcement of the Wage and Hour Division stated that the general contractors audited to date have generally agreed to pay the back wages rather than fight the DOL.

Historically, the primary consideration for determining whether a worker is an employee rather than a subcontractor is the "economic reality" test. Courts considering the issue look to whether the worker is in business for himself, or is an employee economically dependent upon the employer. Donovan v. Tehco, Inc., 642 F.2d 141, 143 (5^th Cir.1991); Brock v. Mr. W. Fireworks, Inc., 814 F.2d 1042, 1043 (5^th Cir.1987), cert denied, 484 U.S. 924. As an aside, the DOL does not apply a test identical to that applied by the Internal Revenue Service, and DOL auditors say that a common problem they encounter in audits is the employer's reliance on their CPA's advice with respect to the independent contractor issue.

Attached hereto as Exhibit "C" is a copy of the Wage and Hour Division publication related to their test for employee status. The DOL audit test and the factors considered by the Fifth Circuit are fairly interchangeable. See Brock, 814 F.2d at 1043. Note that the manner in which the parties have designated that working relationship is not relevant. The Fifth Circuit considers: (1) the degree of control exercised by the alleged employer; (2) the extent of the relative investment of the worker and alleged employer; (3) the degree to which the alleged employer determines the worker's opportunity for profit and loss; (4) the skill and initiative required to perform the job; and (5) the permanency of the relationship. Id; Rodriquez v. Township of Holiday Lakes, 866 F.Supp. 1012(S.D.Tex.1994).

Page four of WH Publication 1297 (Exhibit "C") lists the primary factors considered by DOL auditors. Under this standard, the DOL normally emphasizes: (1) the amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent enterprise, (2) the extent to which the services in question are an integral part of the employer's business, (3) whether or not the contract gives any right to the hiring party to detail how the work is to be performed, (4) whether the hiring party has control of the business of the contractor, (5) the permanency of the relationship, (6) whether the hiring party has the right to cancel the contract at will, and (7)whether the purported independent contractor is performing work that is the same or similar to that performed by the hiring party's employees.

For purposes the construction industry audit, however, the DOL is focusing primarily on the permanency of the relationship (i.e. does this roofing subcontractor obtain all of its jobs through the same contractor) and on two other factors: (1) the amount of the alleged contractor's investment in facilities and equipment, and (2) the alleged contractor's opportunities for profit and loss. If you have clients who depend solely or almost solely on one relationship with a contractor or subcontractor for certain services, those clients risk being found to be joint employers under this industry audit.

If the DOL cannot, based on the foregoing, clearly establish a right of control, the DOL usually moves forward and makes the following additional inquiries:

1. Is the alleged independent contract listed on the payroll with the appropriate tax deductions, or are the payments to this charged to the labor and salary account or selling expenses account instead of the account to which attorneys' fees, auditors' fees and the like are charged?
2. Must employees of the alleged independent contractor be approved by the possible employer?
3. Does the possible employer keep the books and prepare payroll for the possible employee?
4. Is the alleged independent contractor assigned to a particular territory without freedom of movement outside thereof?
5. Does the alleged independent contractor have an independent economic or other interest in his work other than increasing his own pay?
6. How do the respective tax returns of the parties list the remuneration paid?

The DOL will focus on the employment relationship in this industry audit in an attempt to impose liability for FLSA violations upstream to more solvent contractors. Knowing this, your clients should be prepared to show that the factors listed above indicate a true subcontract relationship.

One hopes that most companies operating in the construction industry are prepared to pass this test. In a market governed largely by competitive bids, contractors should be able to show that their subcontractors are, indeed, independent companies or individuals who have invested in the project, control their own work, and share risks of loss and opportunity for profit.

If the foregoing is true, and the relationship between a contractor and its subcontractor or supplier is not unusually longstanding or exclusive, the DOL may have difficulty holding the contractor liable for it's subcontractor's wage violations. Again, no court has addressed the specific issue being raised by the DOL at this time, but some courts have examined the status of independent contractors, particularly welders, in the construction industry. See Carrell v. Sunland Construction, Inc. 998 F.2d 330 (5^th Cir.1993); Robicheaux v. Radcliff Material, Inc. 697 F.2d 662 (5^th Cir.1983). Welders are often hired by contractors on a project basis and designated as independent contractors. A comparison of the two cases cited above demonstrates the factors that the Fifth Circuit, at least, has found to be determinative of employee status.

InCarrell, the court found that a balance of the five factors favored independent contractor status:

Several facts weigh in favor of employee status; for example, Sunland dictated the Welders' schedule, including the timing of their breaks; Sunland assigned the Welders to specific work crews; Sunland paid the Welders an hourly rate that was rarely negotiable; the Welders' compensation while working for Sunland depended on the hourly rate and number of hours worked, both of which Sunland controlled. Despite the facts indicative of an employment relationship, we are convinced that the Welders were independent contractors, not employees. In making our determination, we rely on the following: the Welders' relationship with Sunland was on a project-by-project basis; the Welders worked from job to job and from company to company; many of the Welders spent little time working for Sunland; the Welders worked while aware that Sunland classified them as independent contractors, and many of them classified themselves as self-employed; the Welders were highly skilled; Sunland's customers, the gas companies, tested and certified each welder before each project; Sunland had no control over the methods or details of the welding work; when on a Sunland job, the Welders performed only welding services; the Welders supplied their own welding equipment; and their investments in welding equipment averaged $15,000 per Welder. The economic realities are consistent with Sunland's traditional practice of classifying its welders as independent contractors. The Welders are, as a matter of economic reality, in business for themselves.

998 F.2d at 334.⁽³⁾

In Robicheaux, the court found that the welders were employees, and the case was distinguished in Carrell primarily on the basis of the permanency of the relationship:

But the Robicheaux court's determination of employee status was based on several significant facts that are absent from this case: the welders worked a substantial period of time exclusively with Radcliff Material, ranging from ten months to three years; the welding required on "moderate" skills; Radcliff Material told the welders how long a welding assignment should take; the welders spent only 50% of their time welding, and the remaining time cleaning and performing semi-skilled mechanical work; and Radcliff Material provided the welders with "steady reliable work over a substantial period of time (emphasis added).

998 F.2d at 334.

The DOL's emphasis on the permancy of relationships between contractors and subcontractors most likely arises from this sort of precedent, and from their suspicion that this factor may prove to be the weakest point for many contractors. The good news is that the DOL reports that its early audit results indicated that a surprising number of subcontractors be "appropriately classified." In other words, the DOL may be having difficulty finding cases with any support for their theory of joint employment under the FLSA on construction projects. The department is nevertheless finding enough evidence, it believes, to impose joint liability in many cases, and the general contractors are reportedly agreeing to pay back wages.

Aside from the test of employment relationships, your clients must be prepared during an audit to demonstrate compliance with all of the laws enforced by the DOL. The balance of this article provides an overview of those laws. While the author cannot provide all of the answers to the issues presented by an investigation from the DOL, this paper can provide you with a list of questions you might ask your clients today to determine whether the company is prepared for a visit from the DOL tomorrow.

DOL Authority

Your client's first question may be whether or not the DOL is authorized to enter its business establishment (or approach its employees on a project site) and conduct its investigation without a subpoena. The answer is "yes" and "no." Federal government agents are authorized to enter into places of employment to inspect records and question employees, but the United States Supreme Court has held that the Fourth Amendment prohibition against unreasonable searches and seizures limits the right of federal agents to enter the workplace when the employer has an expectation of privacy (in other words, the DOL may be required to issue an administrative subpoena to obtain the employer's records). Most employers would fall within the protected category, but not all employers do. If your client operates in a highly regulated industry, such as the sale of alcoholic beverages, for example, the company may have waived its opportunity to assert its Fourth Amendment rights.

In short, cooperation with a DOL investigation is voluntary, but interference with the investigation is prohibited. For practical purposes, this means that an employer should remind employees that talking to the DOL is voluntary, and that the employee may be (and should be) cooperative, but ask that a company representative (such as a human resources manager or attorney) be present for the interview.

In the construction industry, audits often begin at the project site. As long as someone at the site grants permission to the interviewers (that someone is likely to be a project superintendent or manager who represents the owner or general contractor), your client's employees might be interviewed by the DOL with no knowledge or preparation on management's part. The key to surviving this type of investigation lies in having your client discuss the possibility of a DOL visit with its employees, and educate them to respond appropriately.

If an investigation occurs, company management should make clear to the investigator its interest in complying with the FLSA, and approach the situation as an opportunity to create a good working relationship. Forcing the DOL to obtain a subpoena or approach employees outside the office is neither an effective nor practical approach. DOL Investigators are usually willing to take the time to explain the requirements of the FLSA and to provide pamphlets and other materials explaining how to meet the Act's requirements. In order to minimize the disruption to business activities, companies may request--and should receive--reasonable accommodation from the inspector with respect to how the inspection is carried out, but the bottom line is that the information must be made available to the investigator. Remember that while cooperation in the audit is technically voluntary, interference with the audit is prohibited, and the DOL is likely to characterize any resistance as interference. If a DOL investigator is denied access to employees to interview, for example, the employees will receive phone calls at home that evening from the DOL investigator.

Wage and Hour investigators are entitled to inspect a company's premises and records, make transcriptions of records, question employees, and generally investigate to the extent necessary to determine whether violations of the FLSA have occurred, or to enforce the provisions of the Act. In view of the DOL's focus on the construction industry and the potential for liability, however, it is good practice for companies to notify their attorney as soon as they become aware of Wage and Hour's intention to investigate the business, and to request that the investigator delay proceedings until an attorney's arrival. As long as an employer's attitude is positive, DOL investigators tend to be cooperative. Early cooperation with the DOL may also prove helpful when later trying to negotiate with the DOL investigator regarding possible violations.

FLSA

The primary law enforced by the Department of Labor is the Fair Labor Standards Act of 1938, 29 U.S.C. 201, et seq. (the "FLSA"). The FLSA mandates minimum wage and maximum hour requirements (a maximum work week of forty hours at $5.15 per hour), overtime pay (payment of time and one half for each hour worked over forty hours in a work week), child labor prohibitions, and record keeping requirements. In essence, it applies to all employers and employees engaged in interstate commerce. With very few exceptions, the courts have interpreted "interstate commerce" to encompass virtually every employer in the United States.⁽⁴⁾ The FLSA protects full and part-time workers and employees who are not specifically exempted by their job duties from the Act. All non-exempt employees are entitled to overtime pay under the FLSA.

The FLSA does not require employers to provide vacation, holiday or sick pay, holiday leave, premium pay for weekends or holidays, fringe benefits or pay raises, discharge notice or reasons for discharge, or rest periods for lunch or rest. If employers provide these benefits, however, the employer must follow its own benefit policies consistently. The employer is not required to pay non-exempt employees on a strict hourly basis either, and may utilize more creative methods of payment, such as piece rate, or salaries based upon a fluctuating work week. These types of pay arrangements must be agreed to in writing in advance, however, to be allowable. In addition, overtime must still be paid. Attached hereto as Exhibit "D" is a Wage & Hour publication which provides some examples of acceptable compensatory schemes for non-exempt employees. Examples of payment by piece rate and salary on a fluctuating work week can be found on pages eleven and twelve of the exhibit.

One issue commonly misunderstood by employers is the difference between an exempt worker and a non-exempt worker. A worker is exempt from overtime requirements if the worker falls within a proper exemption allowing for salaried status. Understanding these issues, and how the DOL interprets work time or "hours worked," is one of the keys to being prepared for a DOL investigation. Both topics are discussed in more detail in later sections of this paper.

FLSA Recordkeeping Requirements

As an initial matter, a DOL auditor will ask to see a company's employment records, and the company has several obligations for retention of records under the FLSA. The act requires all employers to retain the following categories of documents as to each non-exempt employee for three years:

1. Each employee's full name;
2. each employee's home address, including zip code;
3. each employee's date of birth (the provision applies only to employees under 19 years of age);
4. each employee's sex and occupation;
5. the time of day and day of week that the employee's work week begins;
6. the regular hourly rate of pay in any week overtime is paid;
7. the basis of pay (i.e., per hour, per day, per week, per piece commission or sales);
8. total daily or weekly pay excluding overtime;
9. the total overtime pay;
10. the total additions or deductions from the employee's wages;
11. the dates, amount and nature of the items making up the additions or deductions;
12. the total wages paid during a wage period;
13. the date of first payment and the pay period covered; and
14. the total hours worked during each day and total hours worked during each

work week.

See 29 C.F.R. §516.2(a). Recordkeeping for exempt employees is similar, but a bit simpler. For employees who are exempt from overtime requirements, employers must keep records for the areas described in items "a" through "e," "l" and "m" above, plus records of the basis upon which the exempt employees are paid. See 29 C.F.R. §516.3. In other words, the DOL investigator must be able to tell whether the exempt employee is paid on a weekly salary, a monthly commission, or some other allowed compensation method.

The records kept for both exempt and non-exempt employees must be sufficiently detailed to permit calculation of the employees' compensation, including benefits, for each pay period. The records may be maintained in any form, so long as they are "safe and accessible." If an employer's wage practices or exemption claims are challenged in administrative or judicial proceedings (and challenges to exemption claims are among the most common results of an audit), accurate records will be needed for an employer to establish compliance with the FLSA. Accurate records are therefore the most important threshold defense to an audit, and the most important weapon available for fighting DOL findings of noncompliance at the conclusion of the audit. An attorney armed with good documentation may be able to battle the DOL successfully on your client's behalf, but an attorney lacking this ammunition from the client is at a severe disadvantage.

In addition, the FLSA requires retention of records reflecting calculation and payment of wages in general, including time cards, wage rate tables, work time schedules, and records explaining the basis for wage differentials. These records must be retained for two years. The employer is free to choose the method or form of order of the records, provided government inspectors are given access to the information. Any employer who willfully falsifies or destroys these records to avoid payment of wages is subject to a penalty of up to $10,000.00. Mere negligence or failure to retain these records should not subject an employer to such a penalty, but the risk inherent in not maintaining accurate records is not worth testing the Department of Labor's temperament.

FLSA Posting Requirements

In addition to records retention, the employer is faced with some posting requirements. An employer should have posters placed in a conspicuous area of the work place that describe: (1) the prevailing minimum wage rate, the training wage rate, the company's prohibition against child labor, the company's provision applicable to tipped employees, and the enforcement provisions of the FLSA; (2) an employee's rights under the Family and Medical Leave Act of 1993 ("FMLA"); and (3) an employee's rights under the Polygraph Protection Act. If your client employs spanish-speaking individuals, the postings must be written in both English and Spanish.

EPA

Employers should also be aware that the FLSA contains a separate provision commonly known as the Equal Pay Act ("EPA"), which mandates that male and female employees receive equal pay for work requiring equal skill, effort and responsibility and performed under similar working conditions. A DOL investigation of wages may raise questions regarding a perceived disparity between wages paid to men and women for apparently equal work. Unlike the minimum wage and overtime requirements, there are no exemptions from the EPA requirements. Although DOL auditors may look at these records, the EEOC actually has enforcement responsibilities for this portion of the FLSA.

Before your client investigates its own records and prepares to correct any potential EPA problems, however, be aware that an employer's corrective measures can cause as many problems as the initial discriminatory practice. If an employer decides that the company may have a problem under the EPA provisions, the employer should be cautious of the manner chosen to remedy the situation. An employer may not comply with the EPA by lowering the wage rate of any employee; therefore, lowering the wages of men to equal those of women will not solve the employer's problem, nor will lowering the wages of the men and raising the wages of the women to create a compromise rate.

FLSA and Child Labor

The FLSA also prohibits oppressive child labor, and an employer who finds himself in violation of the child labor laws may face substantial civil penalties for violation of those requirements. Child labor regulations are detailed with respect to the types of work which are permitted based upon the age of the child, and are too complex to be addressed within the scope of this article. See 29 C.F.R. § 570 et seq.

If your client employs anyone under the age of eighteen, suffice it to say that the employer should take measures to educate himself on child labor laws in the construction industry. Children under the age of sixteen, for example, are not allowed to work on construction project sites under any circumstances. In addition, most aspects of construction work have been declared hazardous by the Secretary of Labor, and therefore constitute precluded employment of children under the age of eighteen. See 29 C.F.R. §§ 570.50-68.

The DOL takes child labor violations extremely seriously, and an employer may be fined up to $10,000.00 for each child labor violation. DOL auditors are not sympathetic with family excuses, such as the underage employee being the son of the project manager.

Other Acts Enforced by the DOL

Outside of the FLSA, several other federal acts affect wage and overtime laws. The Portal to Portal Act of 1947, 29 U.S.C. §§ 251-262, which amended the FLSA, was enacted to offset the effects of a series of U.S. Supreme Court decisions that had expanded compensable working time to require payment under the FLSA for certain travel and "working" time usually regarded as preliminary and postliminary activities. Disputes in litigation over what constitutes working time under the FLSA and the Portal Act are common and can be complex. In the construction industry, the most common mistake found by DOL auditors is the failure of contractors to pay employees for time spent traveling to or between various job sites.

Three other acts affect work that has peripheral connections to the federal government, and should be considered particularly by companies operating in the construction industry. The Walsh-Healey Act, 41 U.S.C.A. §§ 38 et seq., requires that all employees engaged in providing manufactured materials or supplies to the federal government must be paid the locally prevailing minimum wage as determined by the Secretary of Labor. The provision applies only to federal contracts in excess of $10,000.00 and imposes special child labor, convict labor, and safety requirements, and requires that all affected employees be paid overtime for all hours worked in excess of forty in one week. The Act severely limits the subcontracting of work by a materialman or supplier, and the Act therefore ordinarily does not extend beyond a principal contractor.

The Davis-Bacon Act, 40 U.S.C.A. § 276a et seq. ("DBA") requires that all laborers and mechanics engaged in construction, alteration, or repair of a public work project in excess of $2,000.00 be paid an amount equal to the total of the locally prevailing wages and fringe benefits as determined by the Secretary of Labor. By comparison, the Walsh-Healey Act does not require the payment of locally prevailing fringe benefits. The DBA is applicable to the principal contractor and all subcontractors who work under the principal, and has proved an effective weapon in the past for forcing general contractors to police the conduct of their subcontractors.

The Service Contract Labor Standards Act, 41 U.S.C.A. § 35 et seq., provides that all employees engaged in providing services to the federal government pursuant to a contract in excess of $2,500.00 must be paid the locally prevailing wages and paid separately the locally prevailing fringe benefits or an amount equal to those benefits. The amount and nature of locally prevailing wages and benefits are determined by the Secretary of Labor. The Act contains some exemptions for the provision of transportation, telecommunication services, and public utility services, and also contains a unique successorship provision which requires a contractor who replaces an earlier contractor on a contract to pay the wages and benefits required under the predecessor's collective bargaining agreement.

The DOL considers the actual duties and responsibilities of each employee (regardless of the employee's title or designation) to determine whether or not the employee should be paid on an exempt or non-exempt basis. By way of example, an "office administrator" who also answers the telephone and functions as a secretary is likely to be considered by the DOL as having duties which do not fit within the administrative exemption to allow the employee to be paid on a salary, rather than hourly, basis. As described in more detail below, the office administrator primarily must perform work related to management policies and which requires discretion and independent judgment. An employee who does these things 50% of the time, and spends the other 50% answering telephones, might not meet the exemption.

This particular area of the law represents some of the most misunderstood and misapplied provisions of the basic wage and hour laws. The FLSA governs this issue, and its provisions can be simplified into a few basics, which will provide a framework for a company review. These basics, however, present only the beginning of an analysis, and should not be relied upon without a specific review of the company and the roles of its employees.

Under the FLSA, a basic work week is defined as 40 hours of work before overtime must be calculated and paid. The minimum wage at this time is $5.15 per hour. Unless an employee is exempted from coverage by the FLSA, then the employee must be paid at least $5.15 per hour for each hour worked. If an employee works more than 40 hours in any 7-day period, the employer must pay the individual at least one and = times their regular rate of pay for each hour worked in excess of 40 hours. A work week can begin on any day, at any time, and may not necessarily coincide with a pay period. The DOL considers each work week separately for purposes of FLSA compliance.

The first fundamental question raised by this analysis is how to determine whether an employee is exempt from the FLSA. There are a number of specialized exemptions, but the main issues generally arise over what are commonly described as the "white collar," or "bona fide" exemptions. These exemptions exclude from overtime and hour protection of the FLSA any employee who meets the description of an executive, administrative, or professional employee. Under Section 13(a)(1) of the FLSA, the minimum wage and overtime pay provisions of the Act do not apply to "employees employed in a bona fide executive, administrative, or professional capacity." Meeting these exemptions is not as easy as it sounds. The exemptions depend upon the nature of the duties performed by the particular employee, and on the salary received. A particular title assigned to an employee, or a particular position is immaterial. For each employee that an employer claims to be exempt, a fact specific analysis will be applied by the DOL to determine whether that exemption has been accurately applied. The exempt or non-exempt status is "determined on the basis of whether his duties, responsibilities and salary meet all the requirements of the appropriate section of the regulations."

Executive Exemption (29 C.F.R. §541.1)

The term "employee employed in a bona fide executive... capacity" in Section 13(a)(1) of the Act is defined by the regulations as an employee:

1. whose primary duty is managing the enterprise in which he is employed or of a customarily recognized department thereof; and
2. who customarily and regularly directs the work of two or more other employees; and
3. who has authority to hire or fire other employees or whose suggestions and recommendations as to the hiring or firing and as to the advancement and promotion or any other change of status of other employees will be given particular weight; and
4. who customarily and regularly exercises discretionary powers; and
5. who does not devote more than 20% of his time, or 40% in the case of retail and service establishments, not directly related to the duties in paragraphs (a) through (d); and
6. who is compensated...on a salary basis at a rate of not less than $155.00 per week...exclusive of board, lodging, or other facilities...shall be deemed to meet all the requirements of the section.

The above is commonly referred to as the "long test." Paragraph (e) does not apply in the case of "an employee who is in sole-charge of an independent establishment or a physically separated branch establishment" or who owns at least 80% of the enterprise in which the employee is employed.

If the employee is compensated on a salary basis at a rate of not less than $250.00 per week exclusive of board, lodging or other facilities, and if his or her primary duties consist of the management of the enterprise, including the customary and regular direction of the work of two or more employees, the long test is not applied. "Primary duty" under this "short test" focuses on the chief duty of an employee, or what the employee does which is the most essential to the employer, rather than the secondary tasks and how much time is spent on each task. Dalheim v. KDFW-TX, 918 F.2d 1220, 1227 (5^th Cir. 1990), 1998 WL 30689.

The DOL's regulations implementing the FLSA provide that "in the ordinary case it may be taken as a good rule of thumb that primary duty means the major part, or over 50 percent, of the employee's time." See 29 C.F.R. § 541.103. Where an employee devotes less than 50% of his or her time to management, courts look to other factors in determining what the employee's primary duty is. See 29 C.F.R. § 541.103; Cerbu v. Chicago Building Service, Inc., 1998 WL 30689 (N.D.Ill.).

Professional Exemption (29 C.F.R. § 541.3)

Few employers are able to fulfill the stringent requirements of the professional exemption because its coverage is limited. The term "employee employed in a bona fide...professional capacity" in Section 13(a)(1) of the Act is defined by the regulations as any employee:

1. whose primary duty consists of:
   1. work requiring knowledge of an advanced type of science or learning acquired by a prolonged course of specialized intellectual instruction and study; or
   2. work that is original and creative "in a recognized field of artistic endeavor;" or
   3. teaching, tutoring, instructing, or lecturing...as a teacher in a school system or educational establishment; or
   4. work that requires theoretical and practical application of highly-specialized knowledge in computer systems analysis, programming, and software engineering; and
2. whose work requires the consistent exercise of discretion and judgment; and
3. whose work is predominantly intellectual and varied in character; and
4. who does not devote more than 20% of his time in activities "which are not an essential part of and necessarily incidental to the work described in paragraphs (a) through (c);" and
5. who is compensated at a rate of not less than $170.00 per week exclusive of board, lodging and other facilities.

Again, these factors constitute the long test. Under the short test, employees compensated at a rate of not less than $250.00 per week exclusive of board, lodging and other facilities and who have primary duties consisting of performing the work described in paragraphs (a)(1), (3) or (4) may also be exempt. The salary requirements do not apply to individuals who hold valid law or medical licenses (or are engaged in internships or residency programs).

For purposes of this exemption, a "learned profession" is one generally requiring an advanced type of knowledge, not ordinarily attainable at the high school level. 29 C.F.R. § 541.301. The professions satisfying the prolonged, specialized study requirement include law, medicine, nursing, accounting, actuarial computation, engineering, architecture, teaching, and various types of physical, chemical, and biological sciences. 29 C.F.R. § 541.(e)(1).

Administrative Exemption (29 C.F.R. §541.2)

Typically, many employers are unable to meet the requirements of the executive exemption because their employees do not supervise two or more employees and/or do not have the authority to hire or fire. These same employees, however, may assume managerial duties. Thus, although all the exemptions are construed narrowly, the administrative exemption often provides the greatest opportunity for employers to claim an exemption.

The term "employee employed in a bona fide...administrative capacity" in Section 13(a)(1) of the Act is defined by the regulations as any employee:

1. whose primary duty consists of either:
   1. the performance of office or non-manual work directly related to management policies or general business operations of his employer or his employer's customers; or
   2. the performance of functions in the administration of a school system, or educational establishment...; and
2. who customarily and regularly exercises discretion and independent judgment; and
3. 1. who regularly and directly assists a proprietor, or...bona fide executive or administrative employee; or
   2. who performs work along "specialized or technical lines requiring special training, expertise, or knowledge;" or
   3. who executes under only general supervision special assignments and tasks; and
4. who does not devote more than 20% of his time, or 40% in the case of retail or service establishments not directly related to the duties in paragraphs (a) through (c); and
5. who is compensated on a salary basis at a rate of not less than $155 per week exclusive of board, lodging or other facilities, shall be deemed to meet all the requirements of this section.

Employees compensated on a salary basis at a rate of not less than $250 per week exclusive of board, lodging or other facilities are required to satisfy only the "short test," which is that the employee's primary duty consists of work described in paragraph (a), which includes work requiring the exercise of discretion and independent judgment.

The requirement that the administrative employee exercise "discretion and independent judgment" entails responsibility and judgment that is more than "merely clerical and run-of-the-mill." See Horne v. Singer Business Machines, Inc., 413 F.Supp. 52, 53 (W.D.Tenn. 1976). The term implies the comparison and evaluation of possible courses of conduct, and of making an independent decision after the various possibilities have been considered. 29 C.F.R. § 541.207(a). An employee who merely applies his or her knowledge in following a set procedure or determining what procedure to follow to reach a result does not exercise discretion and independent judgment. 29 C.F.R. § 541.207(c). The decision of the employee need not be final, however, and may be subject to review and revision for the exemption to apply. 29 C.F.R. 541.207(e).

Under some circumstances, a combination of two exemptions described above may allow an employee to maintain an exempt status even if they are unable to satisfy every element of a particular exemption. Under combination exemptions, however, the employee must meet the stricter requirements on salary and non-exempt work. In short, employees qualify for a combination exemption only if they satisfy the long test, including the stricter salary and non-exempt work requirements. The employer bears the burden of proof on exempt status.

The FLSA allows other exemptions as well, including exemptions for outside sales persons, the motion picture producing industry, and amusement, or recreational camps or non-profit educational centers. Some occupations have exemptions from other requirements, such as maximum hour requirements. See 29 U.S.C. 213(b). The only such partial exemptions that are likely to impact the construction industry are exemptions related to automobile mechanics and local delivery drivers. In summary, if your client is paying its employees through any method other than straight hourly time and overtime, you may want to consult the wage regulations or a labor attorney to evaluate the accuracy of the employee designations and your client's recordkeeping.

Aside from salary versus hourly employees, one of the most common questions faced by employers is how to determine what hours actually count as "hours worked" for purposes of the FLSA. The FLSA defines "hours worked" as time during which an employee is necessarily required to be on an employer's premises, on duty or at a prescribed work place. See 29 C.F.R. § 778.223. This definition may require that an employee be compensated for time the employer does not otherwise consider working time, such as travel time, waiting time, and certain meal, rest and sleep periods. Again, the basics described herein represent only the beginning of an analysis, and should not be relied upon without a specific review of the company and the roles of its employees.

The DOL has developed a de minimis rule whereby short periods of time (a few minutes) may be disregarded in calculations of work time. See Jerzak v. City of South Bend, 1998 WL 111156*6 (N.D.Ill.). Generally, courts consider three factors in determining whether otherwise compensable time should be disregarded as "de minimus:" (1) the administrative difficulty in recording the additional time; (2) the total amount of additional time; and (3) the regularity of the additional work. Id.

Employees must be compensated for all time that the employee is "suffered or permitted to work. See 29 C.F.R. § 778.223. An employee is "suffered or permitted" to work when the employer knows, or has reason to believe, that the employee has worked or is continuing to work. See 29 U.S.C. § 785.11. The DOL and courts do not allow employers to get away with not paying an employee overtime if the employer knows that the employee is putting in extra hours, but not recording those extra hours on time sheets. Such work still is considered work for the benefit of the employer, and the employee must be paid accordingly.

For example, if the company knows that its receptionist, Susan, arrives thirty minutes early every work day so that she can organize her desk, clear up matters from the day before, and generally prepare for the working day before the rest of the staff arrives, the employer must pay Susan overtime for those hours, even if she does not record that time on her time sheets. Even if an employee works extra hours that are specifically not approved by the employer, the overtime must be paid. The fact that the employee was not approved to work those hours is a disciplinary matter.

In general, an employer is not required to compensate an employee for meal periods if the employee is completely relieved from duty and is permitted to leave his or her work station for approximately thirty minutes. See 29 C.F.R. § 785.19(a). If an employee's meal time is constantly interrupted, or is frequently less than thirty minutes in duration, the requirements of § 785.19 are not met, and the time is compensable. See Herman v. Palo Group Foster Home, Inc. 976 F.Supp. 696 (W.D.Mich. 1997). A meal break will also be compensable if the employee is required to eat at his or her desk. See 29 C.F.R. § 785.19(a).

The areas of compensable working hours that have caused the most problems are waiting time, on-call time, compensatory time, travel time and sleeping time, preparatory and finishing activities, and training or special meetings. Regulations and case law apply to each of these categories and should be considered in detail if you feel that your client may have a problem with one of these areas.

An employee involved in waiting time, for example, may be one who waits before starting duties because they arrive at the project site earlier than the required time. An employee who arrives earlier than the time designated is not entitled to be paid for the time he waits. If, however, an employee reports at the required time and then waits because there no work is yet available, the waiting time is compensable work. By contrast, all time spent in waiting while an employee is on duty constitutes hours worked. This is true even in cases where the employees are allowed to leave the job site or the premises.

If your client retains employees on an on-call basis, you should analyze that on-call time to determine whether the employees are entitled to compensation. One case from the 5th Circuit determined that when an employee is not actually called to work, any on-call time at home or at locations substantially removed from the employer's place of business is not work time for purpose of the FLSA overtime wage provision. Bright v. Houston Northwest Medical Center Survivor, Inc., 934F.2d 671 (5th Cir. 1991) cert. denied, 502 U.S. 1036. In that case, the employee was required to wear a beeper, restrict alcohol consumption and be able to report to the employer's place of business within twenty to thirty minutes. These factors did not negate the exemption, as the court held that the employee was clearly able to use his on call time effectively for his own purposes. Generally, courts often look to the frequency and duration of the disruption in determining whether the time is compensable. See Paniagua v. City of Galveston, 995 F.2d 1310 (5^th Cir. 1993).

Travel time and sleeping time are dealt with under two general policies: one for employees on tours of duty of less than 24 hours, and another for those who work around the clock. If your client requires long hours which include travel or sleep time, the employee's hours must be analyzed to determine whether they qualify as "hours worked." For example, if employees are scheduled to work for less than 24 hours, but are permitted time for sleep, time permitted for sleeping is considered work time as long as the employees are on duty and must work when required.

Work time during preparatory and finishing activities is also analyzed on a fact specific basis. In general, courts hold that if the preliminary (or postliminary) activity is undertaken for the employer's benefit, then the more indispensable it is to the primary goal of the employee's work, and the less choice the employee has in the matter, the more likely such work will be found to be compensable work. Time spent during meetings, training, workshops and professional meetings is dealt with specifically under the DOL regulations. The time spent will be considered working time unless all of the following four requirements are met:

1. Attendance is outside the employee's regular working hours;
2. Attendance is voluntary (it is not voluntary if attendance is required by the worker or if the employee is led to believe that non-attendance would prejudice working conditions or employment standing);
3. The employee does not perform productive work while attending; and
4. The program, lecture or meeting is not directly related to the employee's job.

29 C.F.R. § 785.27-29. If the State requires training or continuing education of a general applicability as a condition of practice of the trade or profession, and the training is not tailored to meet the particular needs of the employer, the FLSA does not consider such training to be working time.

The idea of "compensatory" time also often causes confusion for employers and, when calculating "hours worked," involves allowing employees to work overtime in one pay period and to take time off in another to compensate for those hours. This scenario is not permitted under the FLSA for private sector employers. Public sector employers, on the other hand, are permitted to use compensatory time under certain circumstances.

The mechanics of an audit have already been addressed. If an employer does not agree with any assessed back wages or penalties, the Secretary of Labor may initiate a lawsuit against the employer. In addition, individual employees may file suit. The Secretary of Labor may file suit to collect unpaid wages and an equal amount of liquidated damages on behalf of the employees, and/or seek an injunction. The Secretary cannot collect its attorneys' fees. Individual employees are barred from filing lawsuits if the Secretary files suit on their behalf. 29 U.S.C. § 216.

Employees may recover unpaid overtime wages, liquidated damages in an equal amount if the violation is "willful", as well as mandatory attorneys fees. The statute does not provide expressly for the recovery of damages for mental anguish or pain and suffering. Id. Frequent and willful violators are subject to civil penalties of up to $1,000.00 for each violation depending upon the size of the business and the severity of the abuse. An employer may also face criminal proceedings for FLSA violations, but this action is rare. The DOL can recommend that the Attorney General seek criminal penalties. Only willful violations are subject to criminal penalties, and the maximum penalty is a $10,000.00 fine or, in the case of second offenses, up to six months of imprisonment. Id. Exhibit "A" describes some of the DOL's recovery of back wages in the construction industry from October 1, 1995 through July 9, 1998.

Defenses

The FLSA contains a statute of limitations of two years for most violations, and a limitations of three years for willful violations. See 29 U.S.C. § 225. The limitations period is interrupted by the filing of an action, or, if the plaintiff is not named ion private action, upon the plaintiff's filing of written consent to be a party plaintiff. See 29 U.S.C. § 256; Atkins v. General Motors Corp., 701 F.2d 1124 (5^th Cir.1983).

Employers may rely upon expressed policies of the Wages and Hours Administrator of the U.S. Department of Labor. Accordingly, an employer can defend against FLSA liability by convincing the trier of fact that the employer's conduct was "in good faith in conformity with and in reliance on any written administrative regulation, order, ruling, approval, or interpretation" of the Administrator. See 29 U.S.C. § 259. Employers may also rely upon the Administrator's practice or enforcement policy with respect to other, similarly situated employers. See 29 U.S.C. § 259.

The employer bears the burden of pleading, however, and the burden of proving this affirmative defense. See Intern. Ass'n of Firefighters v. Rome, 682 F.Supp. 522 (D. Ga. 1988); Brennan v. Valley Towing Co., Inc., 515 F.2d 100 (9^th Cir. 1975). Both actual conformity with the express agency position, and good faith in so doing, are required to establish the defense. See 29 C.F.R. §§ 790.14-.16.; Marshall v. Emerson's Ltd., 598 F.2d 1346 (4^th Cir. 1979). Reliance upon an attorney's opinion in a gray area may establish good faith. See Hill v. J.C. Penney Co., 688 F.2d 370 (5^th Cir. 1982).

An award of liquidated damages is normally mandatory upon the establishment of a violation of the Act. However, if an employer proves to the trier of fact that the act or omission giving rise to the violation was undertaken in good faith, and with reasonable grounds to believe that the act or omission did not violate the Act, the court has the discretionary power to refuse to award liquidated damages. See 29 U.S.C. § 216(b). Prompt action by the employer upon learning of possible violations of the Act is required to establish this defense. See, e.g., Burgess v. Catawba Country, 805 F.Supp. 341 (W.D.N.C. 1992) (employer that learned of possible violations of the FLSA from complaints of employees, but failed to act for a year and a half afterwards, was not in good faith for purposes of reduction in damages).

Aside from the topics covered in this article, many other issues can arise during a DOL investigation. Methods for calculating overtime and regular pay rates, and questions regarding allowable wage deductions represent just two other topics that commonly cause problems for employers.

To minimize your client's risk, try to ensure that all of your clients' employees understand their wages (having compensation agreements in writing often helps avoid contested wage claims) and, when faced with a question about wages or employment policies, instruct your client to never guess. Try to convince your client to seek legal advise before the DOL appears at its door, rather than afterwards.

If your client is faced with a DOL audit, all of these issues, and probably others, may be addressed, at least briefly. For those of us operating in the construction industry, our clients would be wise to conduct a review of company employment records and policies. Under any circumstances, DOL investigations, like IRS audits, can prove to be very expensive, in light of potential back-pay and administrative penalties. If the DOL determines that your client has violated wage and hour laws, that determination can be challenged, and employers should not be afraid to negotiate with the DOL. If the DOL determines that your client is liable for FLSA violations by its subcontractor or supplier, that determination should be challenged. Forcing the DOL to prove its case for joint employment status will likely constitute the construction industry's best defense to the DOL's targeting program.

Pene S. Ferguson

1. Much of the information provided in this article has been gathered through the author's periodic conversations with the Director of Enforcement of the Wage and Hour Division of the Department of Labor, as well as direct experience defending DOL audit procedures in the construction industry.
2. 40 U.S.C.A. § 276a