by Michael H. Boldt and Tami A. Earnhart

One of the most difficult and fact sensitive areas of employment law is the determination of an employee's status as exempt from the overtime requirements of the Fair Labor Standards Act ("FLSA"). If an employee is exempt, the employer is not required to pay that employee overtime. However, if an employee is not exempt, the employer must pay the employee time and one half the employee's regular rate for hours worked over forty in a week. An incorrect designation of an employee's status under the FLSA can create significant exposure to an employer for unpaid overtime. One construction company in Pennsylvania learned this lesson the hard way recently when a court rejected its argument that a "project superintendent," who was paid $80,000 to $90,000 per year and worked 55.5 to 76 hours per week, fell within the "administrative employee" exemption under the FLSA. Carpenter v. R.M. Shoemaker Co., No. 00-5644 (E.D. Penn. May 6, 2003).

Carpenter Decision
The Company, R.M. Shoemaker, is a regional construction management company that is hired by property managers and architects to manage construction and renovation projects. The employee, James A. Carpenter, was hired as a project superintendent and was responsible for providing leadership and supervision of the day-to-day construction operations. The Company argued that it was not required to pay overtime to Carpenter under the FLSA because he was exempt as an administrative employee.

In order for an employee to fall within the administrative employee exemption, an employer must show that (1) the primary duty of the job requires the exercise of independent judgment and discretion; (2) the work is office work or non-manual work related to management policies or general business operations; and (3) the employee is paid a salary of at least $250 per week. The Company had no problem with the third prong of the test, but the court found that the Company did not have enough evidence for the first prong of the test. The court stated that, pursuant to the Department of Labor's regulations, two questions had to be answered to determine whether an employee's primary duty required the exercise of independent judgment and discretion: (1) whether the employee is an administrative worker rather than a production worker; and (2) whether the employee performs work of substantial importance to the employer by directly or indirectly carrying out management policies.

Superintendent Carpenter acted as an on-site contact and reported to either the project manager or the vice-president of operations. The Superintendent's duties included manipulating time schedules, reviewing architectural designs, ensuring work was completed in a timely manner, monitoring the work of subcontractors, compiling daily reports to update the project manager, surveying the site for safety problems, and ensuring that items would fit, locations would work, and no structural problems would be encountered. In short, Superintendent Carpenter was the employee on-site to make sure the work was performed properly.

Although most of Carpenter's duties were non-manual, the court stated that it was not clear that his duties were administrative as opposed to production related. The Company argued that Carpenter's duties were administrative because he represented the Company to subcontractors, architects and owners as the sole employee at the project site in contact with those individuals on a daily basis. In rejecting that argument, the court recognized that Carpenter was the on-site contact, but noted that most of the communications with the subcontractors, architects and owners flowed through Carpenter to a more senior person (project manager or vice-president) who decided what course of action to take. Therefore, the court stated, the Company did not show that Carpenter's duties "affect[ed] Shoemaker's business operations to a substantial degree." The court also looked at the Company's business and noted that Carpenter was supplying the "product" that the Company sold - the management of construction services.

The court then analyzed whether Carpenter performed "work of a substantial importance to the management or operation" of the Company's business. The Company argued that Carpenter's work was critical to the Company's business. The court agreed that Carpenter's duties were important, but stated that the Company did not show how that work affected the structure of the business operations and management policies. Although Carpenter managed the day-to-day construction aspects of a project, there was no evidence that he "developed or implemented specific work assignments consistent with an overall company policy." In sum, the court held that the evidence was insufficient, as a matter of law, to find that Carpenter was exempt from overtime under the administrative employee exemption.

Discussion
As the Carpenter decision highlights, a construction contractor must be cautious when assuming that an individual is exempt from the overtime requirements under the FLSA. As stated at the beginning of this article, the various exemptions under the FLSA are extremely fact sensitive. An employee may have a title that reflects management or administrative responsibilities, but, when his or her job duties are analyzed, the employee may not clearly be exempt.

A mistake in this area could be very costly. For example, if Carpenter is not an exempt employee, the Company will have to pay Carpenter one and one half times his regular hourly rate for every hour worked over forty hours a week. Let's say that Carpenter was paid $90,000 per year and worked an average of 60 hours per week. Assuming Carpenter did not receive any bonuses or other amounts that would be factored into his pay, his regular hourly rate was $43.27 (($90,000 ÷ 52) ÷ 40). His overtime rate is $64.91 ($ 43.27 x 1 ½). Therefore, the employer owes Carpenter an additional $1,298.20 per week ($64.91 x 20), or $64,910 per year (assuming he takes two weeks of vacation)! In addition, Carpenter may receive liquidated damages in an amount equal to the unpaid overtime to a date two years prior to the onset of the litigation (three years if the conduct was willful). Civil penalties can also be imposed in the amount of $1,100 per violation. Finally, any person who is found to have willfully violated the FLSA may be subject, upon conviction, to a criminal fine not more than $10,000 and/or imprisonment for not more than six months.

Possible Regulatory Changes
After hearing the complaints of many employers regarding the confusing application of the various exemptions, the Department of Labor ("DOL") has placed the definition of an exempt employee on its agenda for April 2002 through April 2003. According to the agenda, the DOL will attempt to redefine and delimit the term "any employee employed in a bona fide executive, administrative, or professional capacity." This change is currently in the proposed rule stage of the regulatory process. However, the DOL plans to consider revisions to the various exemptions available and to bring the regulations more in line with the current market.

Conclusion
Until the regulations are changed (if any changes are made at all), construction contractors should carefully review their job descriptions to determine whether an employee is truly exempt under the FLSA. Because the exemptions are not easy to apply, companies should consider getting legal counsel involved in this review. A careful review now may be cost effective in the long run.