The Fair Labor Standards Act: What Contractors Need to Know

The Fair Labor Standards Act is a cornerstone of labor law and shapes the relationship between general contractors and their employees. It is easy to inadvertently violate its requirements, exposing GCs to fines and the payment of back wages, but this article gives an overview of the act and identifies several ways GCs can run afoul of its rules.

Key Takeaways

• The Fair Labor Standards Act (FLSA) establishes rules for the federal minimum wage, overtime pay, child labor, recordkeeping, and other worker protections for employees.
• The FLSA does not apply to bona fide administrators and independent contractors.
• GCs must pay nonexempt employees a minimum wage of $7.25 per hour and pay one and one-half times the regular pay rate for hours worked in excess of 40 hours per workweek.
• The FLSA also establishes the rules for child labor, providing accommodations to nursing mothers, and the recordkeeping used to document compliance with the act.

The Fair Labor Standards Act

The Fair Labor Standards Act of 1938 (29 U.S.C. 201 to 219) establishes the rules for the federal minimum wage, overtime pay, child labor, recordkeeping, and other worker protections for employees. It applies to full-time and part-time employees, is administered by the Wage and Hour Division (WHD) of the U.S. Department of Labor (DOP) and is overseen by the Secretary of Labor.

The FLSA applies to:

• Companies with at least two employees and an annual revenue of at least $500,000.
• Companies regularly engaged in interstate commerce regardless of their revenues and number of employees. Interstate commerce involves commerce between states, including producing goods that will be sent out of state and regularly transacting business in another state. For more information on what is considered interstate commerce, see Fact Sheet #14: Coverage Under the Fair Labor Standards Act (FLSA).

The FLSA requires employers to display an official poster outlining the FLSA provisions in their office and on the job site. You can download it here.

Compliance with FLSA doesn’t relieve the general contractor from complying with other labor laws like Davis-Bacon and related acts, the Americans with Disabilities Act (ADA), the Equal Pay Act of 1963, the Equal Employment Opportunity Act of 1972, regulations passed by state and local governments, and other employment laws.

Exempt Employees

Not all employees are covered by the FLSA. The FLSA exemptions include bona fide executive, administrative, outside sales, and professional employees. Employees exempt from the FLSA provision are referred to as exempt employees, and employees covered by the FLSA are often referred to as nonexempt employees.

GCs should consider an employee’s job duties rather than their job title when determining whether they are exempt. An employee must meet all the following to be regarded as an exempt administrative employee:

• First, they must be paid a salary or fee basis of at least $684 per week. On July 1, 2024, this will increase to $844 per week, and will again increase to $1,128 per week on January 1, 2025. A fee basis is used when an employee is paid by the task or job rather than the hour. This pay typically meets the minimum wage established by the federal government; however, employees would still need to be paid for overtime hours. GCs should check the current salary requirements, as this figure is updated occasionally.
• The employee’s primary duties must be non-manual work directly related to the company’s management.
• The employee's primary duties involve using independent judgment to make significant decisions.

The project management team would often be considered exempt employees, provided they did not perform manual or physical labor on the project. In contrast, working forepersons would typically be regarded as nonexempt employees, and the FLSA requirements would apply to them.

For more information on determining if this exemption applies to an employee, see Fact Sheet #17A: Exemption for Executive, Administrative, Professional, Computer & Outside Sales Employees Under the Fair Labor Standards Act (FLSA) and Fact Sheet #17C: Exemption for Administrative Employees Under the Fair Labor Standards Act (FLSA).

Independent Contractors

The construction industry extensively uses subcontractors to perform work on the job. Usually, these subcontractors would be considered independent contractors under the FLSA, not employees. However, when subcontracting to an individual or small business with one employee, it’s often unclear whether they are an employee or independent contractor. Congress (the House and the Senate) have not established statutory requirements for determining this under the FLSA. However, the Supreme Court has ruled that one must examine individual situations when making this determination. Some of the questions that should be considered include:

• Is the potential contractor's work an integral part of the GC’s work?
• How permanent is the relationship between the potential contractor and the GC? Persons who only work for one GC over an extended period of time are less likely to be considered independent contractors.
• How much has the potential contractor invested in equipment? The more they have invested in the business, the more likely they will be considered independent contractors.
• How much control does the potential contractor have over their work? If the GC controls the work as they would an employee’s work, it is unlikely that they would be considered an independent contractor.
• What is the profit and loss opportunity for the independent contractor? A person with a small investment in the business has little to lose and would be less likely to be considered an independent contractor than someone with a substantial investment.
• How much of the potential contractor’s success depends on their competitiveness in an open market? Persons who work for several contractors and actively bid on open-market projects are more likely to be considered independent contractors.

When making this determination, the DOL does not consider where the work is performed (on-site versus off-site), whether a subcontract exists, if the person is a licensed contractor, or the mode of pay (such as a fixed price for the work). Workers who look like employees are more likely to be considered employees than independent contractors. For more information on determining if the employment relationship qualifies as an independent contractor, see Fact Sheet #13: Employment Relationship Under the Fair Labor Standards Act (FLSA).

One should note that independent contractors with nonexempt employees must still comply with FLSA.

Wages and Overtime

The FLSA requires employers to pay nonexempt employees a federal minimum wage of $7.25 per hour. State and local governments may have other minimum wage requirements that may be more or less than the federal minimum wage. Employers are to pay the greater of these.

Additionally, the FLSA requires employers to pay nonexempt employees an overtime compensation of one and one-half times the regular rate of pay for overtime, which is defined as the hours worked in excess of 40 hours per workweek. A workweek is a recurring 168 consecutive hours (seven consecutive 24-hour periods) set by the employer. Employers need not use the same workweek for all employees. For example, an employer with collective bargaining agreements with several unions can use a different workweek for each agreement.

The regular wage rate used to calculate the overtime rate includes all payments for work except for expenses incurred on the employer's behalf; premiums for overtime, weekends, and holidays; discretionary bonuses; gifts for special occasions; and paid time off.

Paying nonexempt employees a salary or piece-work rate does not relieve GCs from paying overtime. The overtime for these employees is calculated by determining their average hourly wage and applying the overtime premium to it. Alternatively, piece-rate workers may be paid one and a half times the piece rate for the work performed during overtime. For more information on overtime, see Fact Sheet #23: Overtime Pay Requirements of the FLSA.

Handling overtime for nonexempt employees in the construction industry can be tricky. The WHD has issued Fact Sheet #1: The Construction Industry Under Fair Labor Standards Act (FLSA), which specifically addresses compliance in the construction industry.

Child Labor (Under 18 years old)

The FLSA has special rules for employees under 18 years of age. In general, 16- and 17-year-olds can’t operate or help operate construction equipment, like forklifts, skid-steers, backhoes, scissor lifts, cherry pickers, boom trucks, cranes, and compactors. They also can’t operate or help operate power-driven saws, wood chippers, and abrasive cutting discs, nor can they perform demolition, roofing (including work performed on the ground, like removing roofing debris), and most trenching and excavation work. There are also limits on using them to drive motor vehicles.

The FLSA has additional child labor standards, including establishing different hourly rates and limiting the hours of work, for younger employees. The FLSA has exemptions to these rules for approved apprenticeship and educational programs.

State laws may have additional child labor provisions restricting the number of hours minors work and rules about working during school hours.

Nursing Mothers

The FLSA requires employers to provide break time and a place (other than a bathroom) for nursing mothers to express milk for one year after the child’s birth. Employers with less than 50 employees may be exempt if complying causes undue hardship based on the difficulty or expense. For more information on the requirements for nursing mothers, see Fact Sheet #73: Break Time for Nursing Mothers under the FLSA.

Recordkeeping

Employers must keep records for all nonexempt employees to show that they are in compliance with the FLSA minimum wage and overtime requirements. These records must include the employee’s name, Social Security number, address, birthday (if younger than 19), sex, occupation, when the workweek starts, hours worked each day and workweek, basis of pay (such as hourly, weekly, or piecework), regular rate, straight time and overtime earnings for each workweek, additions and deductions from their pay, the total wages paid each pay period, and date the wages were paid.

The FLSA requires employers to keep payroll records for three years. Time cards, schedules, and other records documenting the wage calculations must be kept for two years. For more information on the record-keeping requirements, see Fact Sheet #21: Recordkeeping Requirements under the Fair Labor Standards Act (FLSA). Other Federal laws may require GCs to keep these records longer.

Common Mistakes

1. Simply helping an employee get a contractor’s license and signing a formal subcontract with them does not guarantee that GCs do not need to pay the minimum wage and overtime. They may still be considered employees depending on how the work is performed.
2. Giving employees a managerial title does not exempt them from the FLSA if their duties do not meet the requirements for an administrative exemption.
3. Not reporting all hours. GCs must pay nonexempt employees for work performed before or after their shift, even if they are not clocked in.
4. Not including breaks, downtime, and delays in the hours worked. GCs must pay nonexempt employees for the time they are engaged to wait (waiting for work to do). This may include waiting for instructions or assignments, material deliveries, or for the weather to change so they can perform their job. Short rest periods (usually 20 minutes or less) are working time. For more information on breaks, downtime, and delays, see Fact Sheet #22: Hours Worked Under the Fair Labor Standards Act (FLSA).
5. Not including working meals in the hours worked. Bona fide meal periods (typically 30 minutes or more) are not working time provided the employee is completely relieved of their duties. GCs must pay nonexempt employees for their meal time if they are engaged in work, such as attending meetings, making phone calls, or answering emails. For more information on the requirements for meal periods, see Fact Sheet #22: Hours Worked Under the Fair Labor Standards Act (FLSA).
6. Banking hours or using compensatory time. GCs can’t meet the requirements for overtime by providing the employee with paid time off in some future workweek. Suppose a nonexempt employee works 42 hours during the workweek. In this case, the GC can’t pay the employee for 40 hours of work and give them 2 additional hours of vacation time in the future. Overtime, including the overtime premium, must be included in the pay for the workweek in which the overtime occurred.
7. Treating jobs or job classifications separately when calculating overtime. Suppose a nonexempt employee works two jobs during the workweek. In this case, the hours for the two jobs must be combined when determining the number of overtime hours and pay.
8. Calculating overtime for the pay period rather than for each workweek. When the pay period is other than weekly, the overtime hours and pay must be determined for each workweek. Suppose a nonexempt employee is paid every two weeks and works 44 hours the first week and 30 hours the second. In this case, the GC must pay the employee for 4 hours of overtime for the first week, even though the employee worked less than 80 hours during the pay period.
9. Failure to pay travel. GCs must pay nonexempt employees while traveling during the workday, specifically from the shop to the job site, between job sites, and from the job site to the shop. Suppose a crew completes a job in the middle of the work day and moves to another job. GCs would typically be required to pay the nonexempt employee for the time spent traveling between jobs. There are additional travel requirements that are beyond the scope of this article. For more information on travel time, see Fact Sheet #22: Hours Worked Under the Fair Labor Standards Act (FLSA).
10. Not paying overtime to nonexempt employees who are paid a salary or using a piece rate. Paying a salary or piece rate does not exempt GCs from paying overtime to nonexempt employees. Suppose a nonexempt employee is paid $1000 per workweek and works 50 hours during the week. In this case, the employee’s average wage would be $20 per hour, and the GC would need to pay an overtime premium of $10 per hour for the 10 hours of overtime on top of the salary. A record of the time worked, such as a time card, must be kept for nonexempt employees who are paid a salary or piece rate.
11. Having nonexempt employees sign a contract waiving their rights to overtime. Nonexempt employees cannot waive overtime pay. See Fact Sheet #23: Overtime Pay Requirements of the FLSA.

FLSA Toolkit

The WHD publishes the FLSA Compliance Assistance Toolkit, which provides compliance information for employers and includes many of the fact sheets referenced in this article. Download the toolkit.

Final Thoughts

Amendments and clarifications to the FLSA rules are issued from time to time, so GCs should have qualified human resource or employment law professionals review their employment practices. We recommend that you provide all employees with training on the FLSA requirements, encourage nonexempt employees to track their time accurately, and ensure that management personnel verify the reported time’s accuracy. Accurately tracking hours reduces the GC’s risk of owing back wages.

FSLA is just a piece of your overall construction accounting system. Check out our Ultimate Guide to Construction Accounting for Contractors to learn how to build a profitable, long-lasting construction business.