The legal implications of promotions without raises

December 13, 2011

In this sluggish economy, employers increasingly are balancing the desire to hold the line on expenses while maintaining their valued workers.

Employers know that good employees are worth keeping so they are being forced to become more creative with less incentives and lower revenues. One way employers seek to sustain morale while still being mindful of the bottom line is to promote vital employees without increasing pay.

It’s not illegal to promote employees without offering them raises. Still, there are several key issues employers need to keep in mind to avoid legal disputes.

If you are considering this course of action, you should first review recent promotions made in your company of similarly situated employees. Pay close attention to the demographics of the employees who were promoted and received pay increases in the recent years.

For instance, if you find that you recently promoted and gave a raise to a white male employee but are now proposing to promote a female (or any other employee in a protected class) without a raise, you may be required to articulate a legitimate, nondiscriminatory reason for the discrepancy.

Also, you should determine whether, notwithstanding the lack of pay increase, the promotion will provide the female employee with the same working conditions and/or same long-term earning potential as received by those who were previously promoted. Your ability to articulate a legitimate, non-discriminatory reason for withholding a pay increase in connection with a promotion will be directly tied to your company’s records, circumstances and financial well-being.

You will need to be able to demonstrate how the economic downturn played a role in the company’s decision to withhold the raise.

Before taking action, it’s important for you to communicate to employees your decision to promote without a raise. You should be clear and forthcoming about why you are unable to offer a raise — your overall revenue is down, you’ve lost a customer or contract, your major clients are not paying. Transparency is key when explaining a salary freeze to employees.

This is also a good time to inform the employee of any better working conditions or added benefits of receiving the promotion. Financial compensation and work satisfaction are usually what motivates an employee to remain at the same company; job satisfaction can be derived from better working conditions and not just financial gain.

Although you need to be clear that the promotion does not result in a raise for the employee, you should set forth a clear time line for when the company will reevaluate its position. Once you set the time line and communicate it to your employee, stick to the time line and have a follow-up meeting with the employee so that she has a clear understanding about the potential of receiving a pay raise for the added responsibilities. The goal is to avoid leaving the employee feeling like all she received from the promotion was added thankless responsibilities, which may result in low morale, a feeling of being taken advantage of and a likely consultation with a lawyer.

As with any promotion, with or without pay increases, companies need to be aware of overtime considerations under the Fair Labor Standards Act (FLSA) and of the importance of properly classifying its employees. Promoting an hourly employee into a “management” position and converting his/her pay structure from hourly to salary does not necessarily relieve the company of its obligations under the FLSA.

The question under the Fair Labor Standards Act is never about employees’ title or recent promotion, but rather, what their day-to-day responsibilities encompass. An analysis of the day-to-day responsibilities help determine if the employees fall into one of the exempt categories rendering them exempt from having to be paid overtime.

Changing an employee’s title and only adding some limited managerial responsibilities may not be sufficient to satisfy the factors considered by the Department of Labor to meet the “exemption” requirements necessary to overcome the company’s obligation to pay overtime.

An improper classification could result in unnecessary exposure to a FLSA claim if the employee works more than 40 hours per week in its new “limited managerial” position and the company erroneously believes that his/her salary is adequate compensation.

In a nut shell, companies must often think outside the box in order to survive tough economic challenges and stay ahead of the competition. The important factor for companies to keep in mind is that with every strategy there are issues to consider and take into account.

Catalina M. Avalos is a director at Tripp Scott in Fort Lauderdale, Fla.

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