Wednesday, May 20, 2009

Alternative compensation plans pose wage and hour risks

Employees can be paid in many different ways: an hourly rate, an annual salary, by commission, by piece, a flat rate, with additional established or discretionary bonuses, or in some combination of any of the above. The more creative an employer becomes in how it compensates its employees, the more risks it takes under the wage and hour laws. Baden-Winterwood v. Life Time Fitness, Inc., decided earlier this week by the 6th Circuit, provides a good illustration of how certain alternate compensation schemes can jeopardize employees’ exemptions and render an employer liable for unpaid overtime.

Life Time Fitness paid its employees a pre-determined, semi-monthly base salary, in addition to monthly bonus payments based on year-to-date performance as set forth in a written bonus plan. For the years 2004 and 2005, the bonus plan permitted Life Time Fitness to make deductions from employees’ salary to recover prior bonus overpayments. In 2006, it amended the plan to provide that while it could still make semi-monthly salary deductions for overpayments, “[o]n an annual basis, in no case will the Guarantee Pay be lowered.”

The Sixth Circuit found that the 2004 and 2005 plans violated the FLSA, which does not permit salary deductions “for the reduction of guaranteed pay under a purposeful, incentive-driven bonus compensation plan.” Because the deductions were illegal, the employer could not claim the benefit of the FLSA’s exemptions for its employees during those years.

The loss of the exemptions in this case opened the employer to significant exposure for unpaid overtime. If you are considering implementing an alternate compensation scheme for your employees, also consider a review by experienced employment counsel to avoid a similarly expensive wage and hour miscue.

Presented by Kohrman Jackson & Krantz, with offices in Cleveland and Columbus.

For more information, contact Jon Hyman, a partner in our Labor & Employment group, at (216) 736-7226 or