The U.S. construction industry is huge, with an estimated 650,000 firms in the business employing more than six million people to create nearly $1 trillion worth of structures each year, according to data from the Associated General Contractors of America.
Small businesses are, without argument, the driving force behind this industry. The Small Business Administration reports that no less than 92 percent of construction firms in this country have less than 20 workers. The industry has been good for small firms too. Despite 2009’s real estate collapse, six of the 10 fastest-growing industries here are tied to construction and include firms doing everything from contracting and carpentry to architectural services and real estate sales.
But it’s a tough business with a high failure rate. Only 36 percent of firms in this industry survive after five years, according to research on start-ups around the country. And those survivors can at best hope to see a net profit (before taxes) of about five percent. “Man, I should have never have listened to my dad when he told me to get into the construction business,” one 50-year-old client recently told me.
But will this change? We’re hearing a lot about the Trump administration’s plans for significant spending on infrastructure over the next few years–$1 trillion in spending has been promised. The plan remains short on details, relies primarily on tax credits to private industry and would need congressional approval. But say everything falls into place. Does this mean good times are ahead for the small firms in this industry?
Unfortunately, I don’t think so. At least not in the short term. Of course, some will prosper. But for most, the construction business, regardless of any new infrastructure spending initiatives, will continue to be a challenging area for small businesses to make money–and for these reasons.
Both millennials and boomers are getting in the way of new construction.
Millennials are continuing their migration to the cities and their income levels are still not growing significantly. As a result, we’ve seen a proliferation not of new homes in the suburbs but new downtown high rises for renters. In the meantime, the boomer generation – with the help of the healthcare industry – is living longer and better than any generation before it and, instead of uprooting their lives many are choosing to stay in the homes they purchased decades ago. These two trends have contributed to less homebuilding (and higher real estate prices) which means less work for construction-related companies.
Anti-immigration sentiment will affect both demand and costs.
No one’s certain if that wall will ever be built. But most agree that there’s a stronger-than-ever anti-immigrant sentiment here. A trend towards curtailing immigration in the United States means that an entire population of customers whose dreams of owning a home here will be less than ever before, meaning slower demand for new construction. Compounding this revenue problem are cost pressures brought on by less immigrant workers available to do lower skilled construction jobs which is already causing a shortage of experienced employees in the industry and driving up the costs for construction companies who need bodies.
Higher interest rates and less government support will inhibit home ownership.
As the economy has continued its growth, it is a foregone conclusion that the Fed will increase interest rates shortly and will likely plan additional increases throughout 2017. Higher rates mean more costlier finance which means less incentives to buy new homes in lieu of renting. Also, the Trump administration’s pick for Treasury Secretary, Steven Mnuchin, has expressed his desire for the government to spin off both the Federal National Mortgage Association (or Fannie Mae) and the Federal Home Loan Mortgage Corp. (or Freddie Mac), to the private sector–a move supported by some in the Republican-led Congress. While relieving the government of a controversial and long held economic burden, such action may make it harder for some to get much-needed loans to purchase a new home.
Government spending on infrastructure will benefit a minority of firms.
Economy & Business Alerts
Breaking news about economic and business issues.
The backbone of the Trump administration’s plan to fund its infrastructure investments is offering tax credits to “any corporation that invests in public infrastructure.” That means big firms with deep pockets, strong relationships with large financiers and government approvals to do the work. Sure, some smaller firms will indirectly benefit from sub-contracted services but it will be the Bechtels, Fluors and Turners who will likely benefit the most. Regardless, as anyone in the construction industry can tell you, there’s a long way between project approval and money actually changing hands so at best the flow of most work likely won’t be seen until well after 2017. This is why The American Road & Transportation Builders Association is calling for transportation construction and “related market activity” to grow just 1.3 percent next year, with most of the increase expected to come from the private sector.
There are some bright sides for smaller firms in the industry.
For example, construction activity in certain regions (Texas, Florida, parts of California) are projected to be better than others. But I’m keeping an eye on a trend towards more “social infrastructure” projects. The American Institute of Architects is pushing for more spending on the country’s crumbling infrastructure of public buildings, government offices, schools and libraries that need better air quality, lighting, systems and accessibility. Russ Davidson, the president of the organization recently held a “Build America” summit to promote this initiative with the hopes of diverting some of the government’s spending on roads and bridges.
“It’s all about improving the health of the country,” he said.
As the leader of an organization of almost 9,000 smaller firms, I’m sure he’s also hoping to improve the health of his industry too.
Earlier this month, the paid sick leave epidemic that has spread to four states and at least 24 municipalities found its latest victim — federal contractors and subcontractors. Spurred by an Executive Order (the “Order”), President Obama has tasked the Secretary of Labor with issuing final regulations by September 30, 2016. If implemented, federal contractors and subcontractors will be required for contracts, “contract-like instruments,” and solicitations entered into after January 1, 2017 to provide their employees with at least 56 hours (i.e., seven days) of paid sick leave per year or other 12 month period used by the employer to track employee benefits. In addition and as we previously reported, the Order states that covered businesses must allow their employees to accrue at least one hour of paid sick leave for every 30 hours of qualifying work done by the employee.
The Order follows President Obama’s call to Congress to approve the “Healthy Families Act,” a federal bill that would require all employers nationwide with 15 or more employees to provide paid sick leave to their employees. The “Healthy Families Act,” which has been regularly reintroduced in Congress over the last decade, currently sits in legislative limbo and is unlikely to advance in the next few years. Not to be stymied by the Republican-controlled legislature and in a questionable use of his procurement powers, President Obama signed the Order, which contains many substantive similarities to the Healthy Families Act. For more information on the Healthy Families Act, see our earlier post.
Importantly, and like the Healthy Families Act, the Order expressly states that it shall not “excuse noncompliance with or supersede any applicable Federal or State law, any applicable law or municipal ordinance, or a collective bargaining agreement requiring greater paid sick leave or leave rights than those established under this order.” As a result, covered businesses subject to any of the existing 28 state or municipal paid sick leave laws, likely will need to comply with the most generous aspects of the Order and the applicable state or local laws.
Which Employers Are Covered Under the Order?
As noted above, the requirements set forth under the Order are not limited solely to federal contractors. The Order clearly states that both federal contractors and any subcontractors are covered businesses.
The Order also covers post-January 1, 2017 contracts, “contract-like instruments,” and solicitations if two conditions are met. First, the wages of employees under such agreements must be governed by the Davis-Bacon Act, the Service Contract Act, or the Fair Labor Standards Act. Second, the contract or contract-like instrument must be one of the following:
Which Employees Are Covered by the Order?
The Order applies to all employees “in the performance of the contract or any subcontract.” It is currently unclear how the regulations will define “in the performance of the contract,” or how broadly coverage will extend. We will be sure to advise you of any developments on this point as they become available.
Do Employees Carryover Accrued, Unused Sick Leave at the End of the Year?
The Order mandates that covered businesses allow employees to carry over accrued, but unused sick time from one year to the next. Despite the carry over, employers would still not be required to allow an accrual of more than 56 sick leave hours in any 12 month period.
One takeaway from the Order’s carryover provision is that, unlike many of the existing state and municipal paid sick leave laws, there is no express cap on the amount of accrued, unused time that employees can carry over to the subsequent year. The Order simply states that “[p]aid sick leave accrued under this order shall carry over from 1 year to the next.” As a result, the Order’s carryover provision currently can be interpreted as requiring employers with a paid sick leave policy that provides more than 56 hours of leave per year to allow employees to carryover any accrued, unused time, not just up to 56 hours of accrued, unused time.
Under What Circumstances May Employees Use Sick Leave?
An employee may use sick leave earned under the Order for an absence resulting from:
What Notice Must Employees Provide When Using a Sick Day?
The Order states that covered businesses must allow employees to use accrued sick leave upon the employee’s oral or written request. The request must include the expected duration of the leave. Additionally, if the need to use sick leave is foreseeable, the request must be made at least seven calendar days before the date the leave is to begin. If the need to use sick leave is unforeseeable, the request must be made as soon as is practicable.
Can Employers Require Employees to Provide a Medical Certification?
Covered businesses can only require an employee to provide verification from a health care provider or other certification of the need for the sick leave if the employee has been absent for three or more consecutive workdays. Moreover, employees have until 30 days from the first day of the leave to provide their employer with the certification.
What Can Employers Not Do?
A covered business cannot: (a) require an employee to find a replacement worker as a condition of using sick leave; (b) disclose any verification information or fail to maintain confidentiality about domestic violence, sexual assault, or stalking, unless the employee consents or disclosure is required by law; and (c) interfere with or in any other manner discriminate against an employee for taking, or attempting to take, paid sick leave under the Order or in any manner asserting, or assisting any other employee assert, any right or claim related to the Order.
Must Unused Sick Leave Be Paid Upon Employment Separation?
When an employee’s employment relationship ends, whether by termination, resignation, retirement, or otherwise, the covered business has no obligation to reimburse the employee for accrued, but unused sick time. However, any accrued sick leave must be restored to an employee who is rehired within 12 months of separation from employment.
What Should Employers Do Now?
In the coming months the Department of Labor (“DOL”) and Federal Acquisition Regulatory (“FAR”) Council will begin the march toward issuing final regulations by September 30, 2016. In the meantime, employers should take steps now to ensure that they comply with the Order and are in position to update their policies when final regulations are issued. These are among the actions to consider:
 Connecticut, California, and Massachusetts maintain the only statewide paid sick leave laws that are currently in effect. Please see our earlier posts for more information on the Connecticut, California, and Massachusetts paid sick leave laws. In addition, earlier this summer Oregon enacted the country’s fourth statewide paid sick leave law, which is scheduled to go into effect on January 1, 2016. Please see our earlier post for more information on the Oregon paid sick leave law.
 The municipalities that have enacted or approved paid sick leave laws are: (1) San Francisco, CA; (2) Washington, D.C.; (3) Seattle, WA; (4) Long Beach, CA; (5) SeaTac, WA; (6) Portland, OR; (7) New York City, NY; (8) Jersey City, NJ; (9) Newark, NJ; (10) Eugene, OR; (11) Passaic, NJ; (12) East Orange, NJ; (13) Paterson, NJ; (14) Irvington, NJ; (15) Los Angeles, CA; (16) Oakland, CA; (17) Montclair, NJ; (18) Trenton, NJ; (19) Bloomfield, NJ; (20) Philadelphia, PA; (21) Tacoma, WA; (22) Emeryville, CA; (23) Montgomery County, MD; and (24) Pittsburgh, PA. The Tacoma ordinance was enacted on January 27, 2015 and is scheduled to go into effect on February 1, 2016. The Montgomery County ordinance was enacted on June 23, 2015 and is scheduled to go into effect in October 2016. The Long Beach, Los Angeles, and SeaTac, WA ordinances only apply to hospitality or transportation employers. The Eugene law, while enacted, will not go into effect and will be formally repealed on January 1, 2016 as a result of the impending Oregon statewide paid sick leave law. The Pittsburgh ordinance was enacted on or around August 3, 2015 and becomes effective 90 days after the Pittsburgh Office of the City Controller posts the regulations and notice information for employers, most likely on the City of Pittsburgh’s website.
 The above accrual rate is common in existing state and municipal paid sick leave laws. However, the corresponding 56-hour accrual cap is more generous to employees than that under many of the existing state and municipal laws. In fact, only San Francisco, Oakland, Washington, D.C., Seattle, Los Angeles, Emeryville, and Montgomery County require employers to provide their employees with at least 56 paid sick leave hours each year.
 This includes employees who are exempt from the Fair Labor Standards Act’s minimum wage or overtime provisions.
 The Massachusetts Earned Sick Time Law states that “[e]mployees may carry over up to 40 hours of unused earned sick time to the next calendar year.” Similarly, the Oregon statewide paid sick leave law states that “[t]he employee may carry over up to 40 hours of unused sick time from one year to a subsequent year.”
Update on Mandatory Paid Sick Leave on Federal Work
Federal contractors required to provide paid sick leave
Federal contractors need to be prepared to comply with the U.S. Department of Labor’s final rule “Establishing Paid Sick Leave for Federal Contractors.” The rule, established by the Department’s Wage and Hour Division, went into effect for most federal contracts entered into on or after Jan. 1, 2017.
While it was anticipated that the new Administration would rescind this rule, that has not occurred, nor is there any indication that it will happen soon. Accordingly, federal contractors should prepare to comply with the Department of Labor’s (DOL) final rule.
Contractors who disregard the new requirements can be subject to debarment, among other penalties. The rule implements Executive Order 13706, which requires contractors that are working on federal contracts to provide paid sick leave to certain employees.
In general, the rule:
•Requires that employees of contractors, or subcontractors, working on, or in connection with, federal contracts accrue not less than one hour of paid sick leave for every 30 hours worked.
•Allows contractors to limit sick leave accrual to 56 hours (i.e., 7 days) per year, but requires contractors to carry over an employee’s unused sick leave into the next year.
•Does not require contractors to pay out accrued but unused sick leave when an employee separates from employment. It does require contractors to reinstate an employee’s accrued sick leave if an employee is rehired by a covered contractor within 12 months of separation.
•Allows employees to use their paid sick leave only when working on a covered contract to care for their own physical or mental health and also to care for sick children, parents, spouses or partners, and for circumstances related to domestic violence, sexual assault, or stalking.
Areas with vacation, paid-time-off or other plans which allow employees to receive benefits during times of unemployment may wish to review the terms of the plan to determine whether they meet the obligations of the Rule. In making such a determination, contractors will want to ensure that the requirements to provide sick leave accrual are met by the plan or are incorporated into their payroll system as necessary.
Accrual Year: An accrual year is any 12-month period beginning (1) when the employee begins to perform covered work; or (2) on any date that the contractor sets. If a contractor opts to select a fixed date (Such as January 1) as the start of its accrual year, it must apply the same date to all employees on all covered contracts.
Calculation of Hours Worked: Contractors must include all “hours worked” on or in connection with the contract. The Rule borrows the definition used by the FLSA for “hours worked” meaning the contractor need not include hours when an employee did not work but was in paid leave status. For employees who work on covered contracts and have duties not covered by the contract, contractors must accurately record the employees’ covered and non-covered hours. For covered employees for whom a contractor otherwise does not have an obligation to track their time, contractors may calculate paid sick leave accrual by tracking the employees’ actual hours worked, or by assuming that the employees spend 40 hours per week working in connection with a covered contract.
Tracking of Accrued Sick Leave: The Rule requires contractors to calculate accrued paid sick leave every pay period or once a month, whichever is more frequent. Additionally, the contractor must inform employees, in writing of their total accrued paid sick leave on the same basis. Contractors must also provide a written tally of accrued paid sick leave when an employee asks for the tally, requests sick leave, separates from employment, or has his or her paid sick leave reinstated upon rehire.
Caps on Sick Leave: Contractors may cap their employees’ paid sick leave accrual at 56 hours in each accrual year. Accrued and unused paid sick leave (or unused frontloaded hours) generally must be carried over to the next accrual year. But contractors may limit the amount available for use at any one point in time to 56 hours.
For example, if an employee carries over 20 hours from year 1, they could be limited to accruing 36 more hours in year 2 unless and until they used some of the then “banked” 56 hours. At such time as an employee did use some of the “banked” hours, the employee would again begin accruing hours for year two until once more hitting the 56 hour “bank” cap or have accrued in total 56 hours for year two.
For contractors following a frontloading method, the employee must always be credited with 56 hours at the beginning of the accrual year regardless of the number of hours carried over.
Reinstatement of Accrued Sick Leave Upon Rehire: Contractors need not pay employees for accrued but unused paid sick leave time upon termination, but they must reinstate all accrued but unused paid sick leave time for any employee who is rehired by the contractor or a successor within 12 months after a job separation.
To assist contractors in complying with this rule, SMACNA has prepared the document “Understanding the DOL’s Rules on Paid Sick Leave for Federal Contractors” available on SMACNA’s labor relations webpage.