Paying extra to exempt staff: Will it wipe out their exempt status? — Business Management Daily: Free Reports on Human Resources, Employment Law, Office Management, Office Communication, Office Technology and Small Business Tax Business Management Daily

Paying extra to exempt staff: Will it wipe out their exempt status?

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Question: Say four of your salaried, exempt employees are burning the midnight oil this summer on a special project. Their boss wants to reward them with extra pay and/or extra vacation hours. But you raise this legal red flag: Won’t giving them such an “overtime” bonus be treating them more like nonexempt employees and, therefore, destroy their exempt status?

The answer: No … as long as you structure that extra compensation in the right way.

Case in Point: A group of technical writers at a Michigan nuclear power plant filed a Fair Labor Standards Act (FLSA) lawsuit, claiming they were wrongly treated as exempt under the FLSA’s administrative exemption. The writers filed the suit after the plant decided to save on labor costs by stopping extra overtime payments (paid as a bonus) to the writers.

The result: The court sided with the power plant, saying the writers used sufficient independent judgment and discretion to qualify for the administrative exemption. The writers had argued that because they were given a manual of strict rules on how to do their jobs, they didn’t meet that test. But the plant trotted out job descriptions that showed they operated independently and were free to come up with individual solutions to those guidelines. The extra payments to the writers, by themselves, didn’t defeat the exemption. (Renfro, et al., v. Indiana Michigan Power Company, No. 06-1935, 6th Cir., 2007)

3 Lessons Learned … Without Going to Court

This case turned mainly on whether the writers exercised enough independent judgment to qualify for the exemption. But it also offers a good lesson on how to structure extra payments to exempt employees.

1. Don’t base extra payments on a per-hour basis. While several courts have said that paying extra on an hourly basis doesn’t automatically destroy the exemption, the safer approach is to stay away from a direct hour-for-hour payment. That could make it appear you’re compensating on an hourly basis, which could jeopardize their exempt status. Instead, offer the additional time off as a lump-sum bonus or appreciation reward that’s unrelated to time worked.

2. Reiterate the person’s exempt status. If you pay extra for extra efforts, clearly indicate that you still consider the person as exempt. That way, should you stop making the payments (as in the case above) you haven’t created unreasonable expectations.

3. Don’t call it overtime. Never refer to the payments as “overtime.” Instead, clarify that they are bonuses paid to exempt employees.

The key is to make sure you have sound reasons to back up the employee’s exempt classification. Incorporate those reasons into the job description, and you’ll be able to defend your position if the employees balk at the removal of extra payments.

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