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November 17, 2010
Did Paycheck Deductions Jeopardize Managers’ Exempt Status?

A Minnesota chain of fitness centers deducted bonus overpayments from the paychecks of managerial employees. The employees claimed that these deductions made them non-exempt employees entitled to overtime payments.

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What happened. “Eloise” began working for Life Time Fitness as head of the spa department of a fitness center in Savage, Minnesota in June 2005. She and a number of other executive and managerial employees were paid an annual or base salary with the possibility of a year-end bonus.

Although the correct amount of the bonus could not be determined until the end of the year, Life Time was in the practice of paying employees their bonuses in monthly installments based on year-to-date results. This occasionally resulted in managerial employees such as Eloise being paid more in bonuses than was ultimately justified by their departments’ year-end performances. If this happened, Life Time reserved the right to reduce employees’ future paychecks to make up for the overcompensation.

In late 2005, Life Time notified Eloise and several other employees that it had overpaid their bonuses and would be deducting those amounts from their November and December paychecks. Eloise, for example, received $500 less than she expected from her two monthly checks. She and the other employees did receive the entire annual base salaries to which they were entitled.

Eloise sued Life Time, adding 125 similarly situated employees to what became a class action lawsuit. She claimed that she and her co-workers were not guaranteed a predetermined wage each week because Life Time’s compensation plan allowed it to make deductions from their paychecks. Because their wages were not guaranteed, they were not salaried employees for the purposes of the Minnesota Fair Labor Standards Act (MFLSA) and therefore argued that Life Time violated the MFLSA by not paying them overtime.

The trial court concluded that Life Time had violated the law but the Minnesota Court of Appeals overturned this ruling, finding that the class employees were all exempt under the MFLSA. Eloise and her class members appealed to the state supreme court.

What the court said. The MFLSA sets minimum wage and overtime requirements for employers and specifies which employees are exempt from the requirement that they be paid overtime. Under the MFLSA, an employer who requires an employee to work more than 48 hours per week must pay that employee overtime compensation of 1.5 times the regular rate of pay. (State law is less generous to employees than the federal Fair Labor Standards Act which requires overtime compensation for employees who work more than 40 hours.) The term “employee” does not include any individual employed in a bona fide executive, administrative, or professional capacity; these employees are considered “exempt” and are not eligible for overtime pay.

An employee is considered exempt if she is paid a salary of at least $250 per week and performs certain managerial or administrative duties. An employee receives a salary if she is guaranteed a predetermined wage each week, even if some deductions are made in a given week as long as the week’s total salary does not drop below $250. Eloise and her co-workers did not dispute that they performed managerial or professional duties. They did, however, claim that they did not receive salaries within the meaning of the law.

They claimed that Life Time did not guarantee them a predetermined weekly wage because it could deduct bonus overpayments from their paychecks. This practice, the plaintiffs claimed, made their pay conditional. Life Time countered that these employees always received designated semi-monthly payments of their salaries and that they never received less than their full annual base salaries. The deductions, it argued, did not affect the base pay.

The court observed that each employee received a base salary with a static weekly rate that was not tied to specific hours worked each week. It determined that Life Time did in fact guarantee its managerial employees a predetermined weekly wage. Under these circumstances, the managerial employees received a salary instead of an hourly wage, and so they were correctly classified as exempt employees who were not entitled to overtime. Erdman v. Life Time Fitness, Supreme Court of Minnesota, No. A08-1993 (2010)

Point to remember. It can be tricky to distinguish between exempt and non-exempt employees. Making the terms of compensation crystal clear can help head off misunderstandings.

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