When setting pay and bonus plans, take both federal and Minnesota laws into account

No one ever said it was easy being an employer in Minnesota.

A recent state Supreme Court decision highlights one of the unique problems facing employers: While a pay practice may be valid under state law, it may be illegal under federal law.

To ensure they’re in full compliance, employers must be prepared to change their pay practices to conform with the most restrictive law.

Recent case: Sarah Erdman and other current and former employees of Life Time Fitness worked at health clubs throughout Minnesota. Life Time Fitness classified them as exempt employees. They were paid a set yearly salary, receiving equal biweekly paychecks.

In addition to their agreed-upon annual salaries, which exceeded $33,000 per year, the employees were eligible for performance bonuses based on club membership sales. Those were paid throughout the year, based on estimates calculated on a year-to-date basis.

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That meant that if sales slowed, they could have received bonuses that were too large. The company took back the overpayments over several paychecks whenever it was clear that bonus payments had been greater than the employees ultimately would wind up earning.

Erdman and others claimed that by threatening to dock their salaries—and doing so on occasion—the employer essentially forced the employees to work long hours to achieve higher sales.

As a practical matter, most of the employees regularly put in more than 48 hours every week.

Under the Minnesota Fair Labor Standards Act (MFLSA), hourly employees who work more than 48 hours in a week are entitled to overtime, but exempt employees are not. Erdman claimed that when the company deducted part of the bonus payments from regular paychecks, it destroyed the exemption, making the employees entitled to overtime.

Life Time Fitness argued that the MFLSA merely decrees that exempt employees are guaranteed a predetermined salary.

Because it recouped payments only in excess of the annual salary, employees always received their regular pay—but sometimes got less in a particular week because they had received more in a previous week.

The Minnesota Supreme Court agreed with the company. It pointed out that when it comes to exempt status, the MFLSA and the federal Fair Labor Standards Act (FLSA) use different definitions.

Under the FLSA, exempt employees must regularly receive a predetermined salary, while the MFLSA says that employees are guaranteed only a predetermined wage. The court took that to mean that the company’s practice setting an annual salary and always making sure employees received that salary by year’s end met the state requirement even though the same practice would destroy exempt status under federal law. It dismissed the lawsuit. (Erdman, et al., v. Life Time Fitness, No. A08-1993, Supreme Court of Minnesota, 2010)

Alert for employers with operations in several states

Alert for employers with operations in several states

If you have employees working in different states and use a common pay practice or other universal policies across all locations, check with legal counsel familiar with each state’s laws. In this case, Minnesota law was more favorable to the employer than federal law, but that’s not true for all policies and practices.