If the costs imposed by the EPA’s lead paint rule and an ever-expanding array of safety directives from OSHA weren’t enough, two other federal agencies are producing new regulations, proposing new rules, and issuing new interpretations of existing regs that could significantly alter how you do business. Some of these changes from the National Labor Relations Board and the Department of Labor will place your relationships with subcontractors under scrutiny. Others, which should take effect this year, could force you to choose between raising salaries for some of your employees or begin paying them overtime.

Eli Meir Kaplan Remodelers, like Maryland-based Mark Scott, pictured here at left, will need to keep a close eye on subs and employees’ working conditions under new rulings

Redefining Subs

An August 2015 ruling by the National Labor Relations Board (NLRB) may end up requiring many remodelers to terminate relationships with some of their subcontractors and to bring the work in-house.

Remodelers have been reluctant to expand their payrolls in recent years, and have turned to using more contractors and subcontractors to meet their needs. The NRLB rule, passed in a 3-2 decision, takes aim at that trend. It says that companies can now be held responsible for labor violations committed by any subcontractor that they hire.

“The NLRB will look beyond actual control to the potential right to control to determine whether two entities are actually ‘joint employers’ of the same employee,” predicts Ted Meyer, a Houston attorney specializing in employment law.

One advantage to hiring subs was that employers were not responsible for the employees of the subcontractors: They were only responsible for employees whom they directly hired and who were, therefore, under their direct control. For example, employers did not have the power to set hours, wages, benefits, or other employment arrangements for the employees of the contractors or subcontractors they hired.

Under the new NLRB ruling, two legally separate companies, such as a remodeler and a subcontracting firm whose services the remodeler uses—a roofing company, for example—can be considered “joint employers” of one employee doing one job, even if the remodeler does not have control over that employee’s hours and wages.

According to the NLRB ruling, an employer could be considered a “joint employer” if it has indirect control, or the potential to exercise control, over a contractor’s or subcontractor’s employees.

There are several questions remodelers can ask themselves to determine if and how this ruling will affect them. Here are three of the most important:

  • Is the work being contracted or subcontracted an integral part of your business?
  • Do your supervisors direct the sub’s employees?
  • Do you give a contractor or subcontractor so much work that they do little or no work for anyone else?

If your answer to any of these questions is yes, it can be cause for concern related to the new NLRB ruling.

One part of the rule that won’t affect most residential remodelers is unionization. In the past, employers have avoided collective bargaining requirements by using employees hired by other firms. Now, with the NLRB ruling, companies using workers hired by other businesses will be responsible for labor violations claimed by the employees of those businesses, and could be required to bargain with unions that represent those employees.

More concerning is a provision that allows these employees to protest unfair working conditions and that places responsibility for those conditions on the contractor and subcontractor. This may lead some remodelers to scrutinize how their subs treat employees, and even to cut ties with some subcontractors because they don’t want to have to be responsible for labor complaints by those firms’ employees.

“Because of the array of obligations and liabilities that attach with a finding of joint employer status, [the NLRB decision] would lead many employers to significantly alter or limit the contractual agreements into which they enter,” says Randy Johnson, a senior vice president with the U.S. Chamber of Commerce.

Although the decision from the NLRB is now law, it’s not clear how it will be enforced, says Ted Meyer, a shareholder in the Houston office of Ogletree, Deakins, Nash, Smoak & Stewart, P.C., an employment law firm. “It’s unclear whether the courts or other agencies will follow it,” he says.

Eli Meir Kaplan Going forward, remodelers will have added factors to consider in how they classify subs and employees.

Still, according to Meyer, to be on the safe side remodelers should review their contractor and subcontractor agreements and revise them to minimize any contractual right to control the actions of the contractor’s or subcontractor’s employees. “The NLRB will look beyond actual control to the potential right to control to determine whether two entities are actually ‘joint employers’ of the same employee,” he says.

How are remodeling contractors responding to the new ruling? The rule’s captive sub prohibition is the easiest to grasp, and it should come as no surprise that larger firms are already on board. “We are exceedingly careful about this and always have been,” says Julia B. Spence, vice president, human resources, for the Neil Kelly Co., a Portland, Ore.-based remodeling firm with 203 employees. “Those we hire as independent trade contractors are exactly that—people who have businesses of their own, have multiple clients, and have all of the licensing, bonding, and insurance required to be in business. To the best of my knowledge, we have no trades that are not official and legally in business. We ask for quite a bit of documentation before we accept them for our ‘Approved Trades’ list from which our salespeople and project managers may obtain quotes.”

Some smaller remodelers also prefer to avoid the liability. One of these is Mark S. Scott, president of MARK IV Builders, a Cabin John, Md.-based remodeling and design/build firm with 10 employees that specializes in whole-house remodels, new additions, and master suites. He says that using “captive subs” has never made much sense. “The penalties are harsh, making the little bit of money you can save by not putting someone on the payroll not worth the risk,” Scott says. He admits that playing by the rules forces him to charge more for his services, but doesn’t have much sympathy for contractors who say that their market won’t support that. “That tells me that they have to learn how to sell and to properly manage their businesses.”

New Overtime Rules

An updated regulation from the Department of Labor (DOL) is scheduled to go into effect sometime this year and could have a big impact on some remodelers’ compensation structures.

Currently, employers are not required to pay overtime to certain managers and administrators if they work more than 40 hours a week and are classified as salaried employees, as long as they earn more than $23,660 per year—about $455 per week.

Those numbers are about to change. The DOL has introduced a rule that will more than double that wage floor. The exact amount hasn’t been determined yet, but most experts put it at a little over $50,000. In other words, any employee currently classified as a manager or administrator who is paid a salary, and therefore exempt from overtime, will soon need to earn a that $50,000+ per year minimum in order to keep the overtime exemption.

Eli Meir Kaplan In addition to thinking about how they classify subs versus employees, remodelers also may have to re-evaluate hourly versus salaried employees--and adjust workforce hours accordingly.

Those with lower annual salaries will need to be re-categorized as non-exempt, or hourly, meaning that employers will have to pay overtime for anything over 40 hours per week. The DOL estimates that 4.6 million employees would be affected. Other organizations, such as the Economic Policy Institute, estimate as many as 15 million.

Companies with employees who fit this category have two choices. They can start paying those employees hourly and pay overtime for work over 40 hours per week, or they can increase salaries to the new minimum needed to maintain the overtime exemption. Employers with salaried workers who earn $30,000 or $40,000 per year are unlikely to want to pay an extra $10,000 to $20,000. Instead, most will likely convert those employees to non-exempt status and keep a closer watch on the hours worked.

While there will be problems for employers when this rule takes effect, the shift from salaried to hourly status could also derail employees from career tracks they consider important to their futures. In fact, Scott predicts that the most likely victims will be ambitious young managers who are discouraged from working the extra hours needed to advance in the business because their employer don’t want to risk the liability of overtime wages.

“I’ve never worked a 40-hour week, but always did extra work even though I wasn’t asked to,” says Scott. “My commitment to improving myself helped me move up the ranks quickly, save money, and ultimately start my own business 33 years ago. That is going to be a lot harder with the government tying everyone’s hands.” He believes that the overtime requirement will lengthen the time it takes for a hard-charging $35,000-per-year assistant superintendent to move up to greater responsibility and higher pay. Employers might also centralize oversight responsibilities with higher-level managers, thus cutting down on the number of pathways for lower-level managers to advance their careers.

If remodelers are forced to pay higher salaries or overtime they will, of course, have to find ways to make up the costs. In a recent NAHB member survey, 55% of respondents said they would have to reduce or eliminate employee bonuses, while one-third would reduce or eliminate benefits. “If this goes into effect it will be a big change for everyone,” says Scott.

Sources connected with the DOL are confident that it will go into effect, though they don’t agree on the exact timetable. “The DOL’s regulatory agenda predicted a final rule by July 2016,” says Al Robinson, a shareholder in the Washington, D.C., office of Ogletree, Deakins, Nash, Smoak & Stewart, P.C., and former acting administrator of the DOL’s Wage and Hour Division. However, Patricia Smith, DOL’s Solicitor of Labor, said at the American Bar Association conference in November that a final rule “will not be likely before late in 2016.”

In the meantime, what should remodeling contractors be doing? “Start by identifying employees currently classified as exempt who earn between the current salary of $23,660 a year and approximately $50,000 a year,” says Robinson. The contractor should then evaluate whether it is able to increase the salary level for these employees to the threshold amount. If not, it may make more sense to reclassify a position as non-exempt and start paying an hourly wage.

In any case, according to Marie Ruettgers, managing attorney with Sioux Falls, S.D.-based Goosmann Law Firm, remodelers should not wait until the last minute to begin preparing. “Based on the industry publications and the experience of the last time overtime pay regulations were changed, the general consensus is that there will be a very short window for employers to implement the required changes,” she says. “The window for implementation could be a short as 30 to 60 days once the final rules are announced.”

Ruettgers is advising all employers to audit their workforces in the first half of 2016 and to identify positions that are likely to be reclassified as non-exempt. “Waiting until the new rules are implemented could result in costly mistakes if employers only have 30 to 60 days to conduct their audits and identify positions that need to be reclassified,” she says.