“Mind-Numbingly Complex” Incentive Pay – It might create more problems than it solves…

As an employer, you’re regularly challenged to develop new and unique ways to motivate employee performance and productivity incentive-based compensation.  And while your incentive-pay system might ultimately be found legal, the more complex you make it, the more likely it might be challenged in the court system.   One such system recently found its way to court.  And while the employer ultimately prevailed, it did so only after lengthy (and likely costly) litigation.

On November 15, 2017, the Ninth Circuit Court of Appeals evaluated a highly complex incentive pay system.  In that case, the employer paid employees varying rates of pay based upon the tasks they performed.  Some of those tasks were compensated at an hourly rate below minimum wage, while others were compensated at a rate higher than the minimum wage.  The concept behind the system was to incentivize employees to spend more of their time engaged in revenue-generating tasks.   At the end of each workweek, the employer would calculate the amount of total wages due and – this is important – if the wages due did not compensate the employee at least the minimum wage, the employer would provide “subsidy pay” to make up the difference.

Wage and Hour MazeSound confusing?   The Ninth Circuit thought so too, calling the employer’s compensation system “mind-numbingly complex.”

Employees sued, alleging the system violated the FLSA because some of the hourly rates assigned to some of the tasks were below minimum wage.  The Ninth Circuit disagreed, noting that the Department of Labor “established the workweek as the measuring rod for compliance at a very early date.”  So long as the average wage paid to an employee over the workweek meets the minimum wage, the employer is compliant.  The Ninth Circuit joins the Second, Fourth, Eighth, and D.C. circuits, who uniformly agree on the workweek-average standard.  The Seventh Circuit has not yet weighed in, but its 2001 guidance in Howard v. City of Springfield, holding that overtime is measured on a workweek-by-workweek basis, suggests it would likely be on board with its sister circuits.

It’s important to note that this averaging is limited to a workweek.  The court’s ruling would not permit employers to average employee hourly pay over multiple weeks, or across months, only to later “make up the difference.”

The real takeaway from this case?   Sometimes it is costly to be correct.

Incentive- and variable task-based compensation systems may offer positive benefits to your organization and can encourage employees to be more productive.  But the systems must be clearly communicated and understood by employees.  The more complex they are, the more confusion they can create, and the more legal challenges they may invite.  The goal is to develop a system that serves dual purposes – one that effectively incentivizes your workers, but that is clear and easy to understand.


Image Credit: From Pixabay, Creative Commons license, free for commercial use.