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Beware incentive plans that deduct pay from exempt employees

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The Fair Labor Standards Act (FLSA) sets strict rules for who can be classified as an exempt employee not entitled to overtime pay. One of those is the so-called salary-basis test.

Exempt employees must be paid the same salary regardless of the quality or quantity of their work in any given pay period. In other words, employers can’t make deductions from pay for poor work.

Recent case:
Amy Baden-Winterwood and several other current and former employees of Life Time Fitness, a health club chain, received salaries as exempt administrative employees. They also worked under a compensation plan that set certain goals for selling memberships in the clubs. The company called this a “bonus plan” and made payments under the plan each pay period.

In other words, the bonus payments were included in the employees’ regular salaries.

The trouble began when the company started making deductions from regular pay when some employees didn’t meet their performance and membership goals.

Baden-Winterwood and other employees sued, alleging that the deductions destroyed their exempt status and that they were therefore entitled to overtime payments for any hours worked in excess of 40 hours in any workweek.

The company argued that the deductions weren’t made because of the “quality or quantity” of the work.

The 6th Circuit Court of Appeals disagreed. It said that the bonus plan clearly was tied to individual performance and therefore making the deductions violated the salary-basis test and destroyed the exemption. (Baden-Winterwood, et al., v. Life Time Fitness, No. 07-4437, 6th Cir., 2009)

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