June 2012 Volume XI No. 3 Taking Care of Business
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Pay-if-Paid Clauses Can Destroy Your Bond Claim Rights

Kim Peil
Kim Peil

In the construction industry, bonds are typically put in place to ensure that a subcontractor is paid if the general contractor fails to receive payment. Currently, in Indiana, pay-if-paid provisions can eliminate a subcontractor’s bond claim rights.

On May 11, 2012, the United States Court of Appeals for the Seventh Circuit in BMD Contrs., Inc v. Fidelity & Deposit Co. of Maryland., 2012 U.S. App. LEXIS 9558 (7th Cir. Ind. May 11, 2012) held that pay-if-paid provisions are enforceable in Indiana, and that a surety can assert all defenses available to its principal, including a pay-if-paid provision.

The facts that gave rise to the case involved the construction of a plant for the purpose of manufacturing automobile transmissions in Tipton, Indiana. The general contractor for the construction of the facility, Walbridge, had entered into multiple subcontracts, including one with Industrial Power for mechanical and piping work. Industrial Power entered into a second level subcontract with BMD to perform the piping work.

Industrial Power executed a payment bond with Fidelity, making Fidelity a surety for Industrial Power’s payment obligations to BMD. Before construction of the plant was complete, the owner filed for bankruptcy, causing a series of payment defaults to flow down the levels of contractors and subcontractors. Walbridge failed to pay Industrial Power and Industrial Power failed to pay BMD. BMD then made a claim against Fidelity due to Industrial Power’s failure to pay, and Fidelity refused to pay BMD. BMD sued Fidelity on the bond.

The subcontract between Industrial Power and BMD contained language conditioning Industrial Power’s duty to pay on its own receipt of payment. It stated:

This language was construed by the Seventh Circuit as a “pay-if-paid” clause, meaning that Industrial Power only had to pay BMD if it received payment under its own contract with Walbridge. The Court rejected BMD’s argument that the contract language in question was a “pay-when-paid” clause, which would have merely extended the time that Industrial Power had to pay BMD, not its ultimate duty to pay. The Court also rejected BMD’s argument that pay-if-paid clauses were void under Indiana’s public policy. And finally, the Court held that Fidelity, as a surety, could assert all the defenses of its principal, Industrial Power, even though the bond itself did not specifically incorporate the pay-if-paid language. The Court ultimately determined that Fidelity was not liable on the bond.

Subcontractors should carefully review their contracts to ensure payment in the event a property owner fails to pay the contractor.

Please contact us at www.hwelaw.com if you have questions regarding this article or if we can be of assistance.


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Time Spent Changing Into Protective Safety Gear Non-Compensable Under FLSA

Lauren Kroeger
Lauren Kroeger

The Seventh Circuit Court of Appeals held that the Fair Labor Standards Act ("FLSA") does not require employers to compensate employees for the time they spend in putting on and taking off their work clothes in a locker room at the plant ("clothes-changing time") and in walking from the locker room to their work stations, and back again at the end of the day ("travel time"). Sandifer v. United States Steel Corp., 2012 U.S. App. LEXIS 9302 (7th Cir. May 8, 2012). The Court of Appeals observed that Congress intended "to allow the determination of what is compensable work in borderline cases ... to be settled by negotiation between labor and management." The Court further observed that the collective bargaining agreement between U.S. Steel and the steelworkers union in this case does not require compensation for "clothes changing time" or "travel time" and that none of the previous collective bargaining agreements between U.S. Steel and the union since 1947, nine years after the FLSA was enacted, required it either. The Court refused to expand the FLSA to require employers to compensate employees for this time. In fact, the Court of Appeals observed that the Plaintiffs' position in this case is "adverse to their union, to the interests of other steelworkers, and to their own long-term interests", reasoning that

If the workers have a legal right to be paid for that time, the company will be less willing to pay them a high wage for the time during which they are making steel; it will push hard to reduce the hourly wage so that its overall labor costs do not rise. The steel industry is international and highly competitive, and unions temper their wage demands to avoid killing the goose that lays the golden eggs. They don't want the American steel industry to go where so much American manufacturing has gone in recent years - abroad.

The FLSA requires that workers be paid at least the federal minimum wage for all hours worked, and time and a half for hours worked over 40 hours in a week. The statute, however, does not define "work" - a critical term that the courts must define. The FLSA excluded, from the time during which an employee is entitled to be compensated, "any time spent in changing clothes or washing at the beginning or end of each workday which was excluded from measured working time ... by the express terms of or by custom or practice under a bona fide collective-bargaining agreement applicable to the particular employee." 29 U.S.C. §203(o). The Plaintiffs argue that this exclusion is inapplicable - and that they are therefore entitled to compensation - because they are not changing "clothes" but are changing into and out of safety gear. The Court of Appeals, in rejecting the Plaintiffs' argument, held that clothing by nature is protective:

It would be absurd to exclude all work clothes that have a protective function from section 203(o), and thus limit the exclusion largely to actors' costumes and waiters' and doormen's uniforms.
In addition, the Court held that putting on a hard hat and safety glasses and inserting ear plugs was not compensable because those activities lasted only a few seconds and were de minimis.

The Court further held that "travel time" is non-compensable given the Court's determination that the "clothes-changing time" was non-compensable. The Court explained that
If it is not work time - the workers aren't being paid and their union has agreed to their not being paid - how can it be one of the "principal ... activities which [the] employee is employed to perform"? He is required to wear work clothes, and for that matter he is required to show up for work. But he is not employed to show up or employed to change clothes. Not all requirements imposed on employees constitute employment. An employee may be required to call in when he is sick, but unless he is on paid sick leave he is not paid for the time it takes to place the call.

Seventh Circuit Holds That Pharmaceutical Sales Representatives Are Exempt From Overtime Requirements Of FLSA Under Administrative Exemption

In a case of first impression in the Seventh Circuit (which includes Indiana, Illinois and Wisconsin), the Court of Appeals held that pharmaceutical companies Eli Lilly & Co. and Abbott Laboratories properly classified their sales representatives under the administrative exemption to the overtime requirements of the Fair Labor Standards Act ("FLSA"). Susan Schaefer-LaRose v. Eli Lilly & Co., 2012 U.S. App. LEXIS 9300 (7th Cir. May 8, 2012), Jirak v. Abbott Laboratories, Inc., 2012 U.S. App. LEXIS 9300. Current and former sales representatives sued their employers, claiming that they were misclassified as exempt employees and denied overtime compensation in violation of the FLSA. The employers contend that both the administrative exemption and the outside sales exemption, 29 U.S.C. § 213(a)(1), remove the sales representatives from the overtime requirements of the FLSA. The Seventh Circuit, observing that the outside sales person exemption issue is before the United States Supreme Court in another case, focused its decision solely on the administrative exemption.

The Plaintiffs argued that they were not exempt from the overtime requirements of the FLSA because they did not actually sell the drugs to the physicians, but merely engaged in promotional and sales-like work focused on a limited, select group of physicians. The Plaintiffs argued that the administrative exemption is designed for higher level employees whose work is targeted at sales, promotional and marketing policies of the company overall. In rejecting the Plaintiffs' argument, and holding for the employers, the Court of Appeals held that the sales representatives' work is properly characterized as administrative:
directly related to the general business operations of the employers, which satisfies the second prong of the administrative exemption.
The Court of Appeals, in rejecting the Plaintiffs' arguments, reasoned that the sales representatives are the public face of their employers in communicating with the most important decision-maker regarding use of the companies' products - the prescribing physicians. Their goal is to promote sales and their work is based on maintaining continuous and regular contact with the physicians, anticipating their objections and concerns and addressing them on behalf of their employers.

The Court of Appeals also concluded that the primary duty of the sales representatives included "the exercise of discretion and independent judgment with respect to matters of significance" - another requirement for the applicability of the administrative exemption. Specifically, the Court held that although the sales representatives must deliver specific messages to the doctors - in compliance with regulatory requirements applicable to the pharmaceutical industry - the sales representatives must tailor those messages to respond to the circumstances. As such, the representatives were required to exercise "a significant measure of discretion and independent judgment."

Please contact us at www.hwelaw.com if you have questions regarding this article or if we can be of assistance.

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