Community Associations Beware!

The Ramifications of the Updated Federal Overtime Regulation

By David Podein, Esq. & Roger Slade, Esq. / Published August 2016

The U.S. Department of Labor (DOL) recently announced an updated regulation that will extend coverage of overtime pay under the Fair Labor Standards Act (FLSA). The updated regulation increases the annual salary threshold for paid overtime employees from $23,660 to $47,476. Employees who earn up to $47,476 annually (or $913 per week) will become eligible to receive time-and-a-half pay, provided that they work more than 40 hours per week. For “highly compensated employees,” who earn more than $47,476 annually, the updated regulation increases the threshold from $100,000 to $134,004, and thus, those who earn up to $134,000—after factoring in bonuses—may become eligible to receive overtime pay as well.

The majority of these “highly compensated employees” will continue to be exempt from the overtime regulation, however, if they perform office or non-manual work related to the general business operations of the employer. Nevertheless, the DOL estimates that 4.2 million workers will become newly eligible for overtime pay once the regulation goes into effect on December 1, 2016. An estimated 331,000 workers in Florida alone will gain new overtime protections. This estimated increase begs the question: in the wake of the impending regulatory changes, how will the community association industry be affected?

The relevance of the updated federal overtime regulation to the community association industry hinges on whether workers are employed directly by the associations, are independent contractors, or are employees of the associations’ independent contractors.      

Given that many community associations outsource their employment needs to third-party vendors, most workers in the community association industry are independent contractors or employees of the associations’ independent contractors; therefore, the majority of community associations will likely remain relatively unaffected by the financial implications of the updated overtime regulation. On the other hand, associations that directly employ managers, building engineers, and other employees will need to comply with the updated regulation and bear the costs for any qualifying employees. Thus, the associations which employ workers directly must comply with the updated federal overtime regulation.

Associations should be cognizant of the potential penalties for noncompliance with the updated overtime regulation. Under the FLSA, any employer who violates the overtime compensation laws may be liable not only for the shortfall but also for liquidated damages. Indeed, in Leonard v. Carmichael Properties & Mgmt. Co.,  the court ruled against a Florida property management company and awarded the employee, who was the caretaker of the apartment complex, $12,544.29 in unpaid overtime as well as an additional $12,544.29 in liquidated damages due to the property management company’s lack of good faith with respect to underpaying the caretaker. In addition to monetary damages, there has been at least one instance where a company president was sentenced to jail time for intentionally underpaying his employees for overtime hours. For associations which may employ many employees covered by the FLSA, there is also potential exposure for class action liability in which one employee may sue on behalf of the rest of the employees, who may have similar claims. The consequences for noncompliance with the updated overtime regulation may be harsh, and despite the fact that community associations are separate legal entities, their officers and directors may be held personally liable in extreme circumstances.

Irrespective of the employee/independent contractor dichotomy, there are several distinct categories of workers who are exempt from the updated overtime regulation, as set forth in Section 13(a)(1) of the FLSA as defined by 29 CFR Part 541. The exemption applies to all bona fide executive, administrative, professional, and outside sales employees who meet certain tests regarding their job duties. With respect to specific occupations, the DOL projects that general and operations managers, construction managers, and lawyers are among those who are the least likely to be eligible to receive overtime benefits, as they will likely be exempt. Conversely, the DOL projects that property and community association managers, janitorial workers, and security guards are among those who are the most likely to be eligible to receive overtime benefits, as it is unlikely that those employees will be considered exempt.

The DOL estimates that more than 800,000 employees in the construction industry will be affected by the changes in the overtime regulation. MarketWatch delves even deeper and predicts that salaried employees in the construction industry are among those who stand to gain the most from the updated regulation.  Under the former regulations, many of the salaried workers in the construction industry were not covered, as they earned more than $23,660 annually. The increase in the salary threshold, however, will now encapsulate a sizable share of the industry’s salaried workers. The question becomes: viewed through the lens of the community association industry, why is it important to take into account the updated regulation’s impact on the construction industry? In short, the likely increase in labor costs to construction companies may potentially have an indirect but profound impact on community associations, which may see an increase in construction costs.

In light of the potential implications, the updated regulation is likely to have a deterrent effect on the associations that are contemplating the direct hiring of new employees. Associations may become more inclined to outsource their services to third-party vendors in an effort to avoid the overtime requirements. Moreover, with respect to associations that directly employ workers, associations should consider strictly monitoring their employees’ hours to ensure they do not work more than 40 hours per week. The importance of a time clock and a detailed recordkeeping system cannot be understated.   

Under the FLSA, all employers must keep certain records (such as hours worked per day, total hours worked per week, total overtime earnings for the workweek, etc.) for each non-exempt worker. The records on which wage computations are based must be retained for at least two years. As such, a time clock may be useful to employers to allow them to keep an accurate record showing the exact schedule of daily and weekly hours an employee worked, and whether the employee followed his or her schedule.

In conclusion, most association employees who are actually employed by third-party vendors will likely not create issues for the associations who are not their employers. However, for associations that directly employ covered, non-exempt employees, the updated regulation is likely to have a significant impact. Diligence, compliance, and meticulous recordkeeping are the key to avoiding FLSA claims under both the statute and the updated regulation.

David T. Podein

Partner at Haber Slade

David T. Podein is a partner at the law firm of Haber Slade. He concentrates his practice in the areas of real estate leasing and construction, contract negotiations, real estate development disputes, condominium and community association law, and bankruptcy litigation. Podein can be reached at dpodein@dhaberlaw.com.

Roger Slade

Partner at Haber Slade

Roger Slade is a partner at Haber Slade. He is a commercial litigator who specializes in contract and partnership disputes, real estate litigation, and employment matters. Slade can be reached at rslade@dhaberlaw.com. The authors gratefully acknowledge the assistance of Brett Silverberg, a law student at the University of Miami, for his assistance in connection with the preparation of this article. The firm is on the Internet at www.haberslade.com.