Thursday, June 18, 2009, 4:39 PM

But That's What a Bonus is For!

We frequently remind you that in order to utilize the executive or administrative "white collar" overtime exemptions, it is necessary that the employee in question be paid on a "salary basis" - an amount which doesn't fluctuate when the quantity or quality of work varies. The US Court of Appeals for the Sixth Circuit (covering Kentucky, Michigan, Ohio and Tennessee) recently brought this lesson home - expensively - in Winterwood v. Life Time Fitness, Inc. In 2005, the year after the new FLSA regulations took effect, the employer looked at the results suggested by its compensation plan and decided to "claw back" overpayments of bonuses which department heads had received, determining that those bonuses had not been "earned."

The District Court for the Southern District of Ohio sided with the 8-plaintiff class, reasoning that the recoupment of the bonuses destroyed the "salary basis" because it was a reduction in pay based on quality of work; however, since there were actual pay reductions levied in only three pay periods, the trial court ordered back pay for only those losses. The appeals court viewed the situation as more serious, saying that as of the effective date of the new plan the managers were not paid on a salary basis, were no longer exempt, and were entitled to overtime compensation for all hours worked in excess of 40 in any workweek. The bonus plan, the appellate panel said, created a "significant likelihood of improper deductions" even though, looking at what has actually happened, that "likelihood" had materialized in only three payroll cycles in 2005.

The moral? Just because something makes sense from the standpoint of business judgment has little to do with whether the FLSA's requirements have been met.

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