Changing Employee Compensation – Ask #HR Bartender
There are days when I’m totally amazed at some of the things that I hear employers are doing. While this reader note is focused on sales compensation, I could see it happening with any position in the organization. So, it’s worth a read.
I’m in sales and have been with my company for almost 3 years. During that time, I’ve received one pay raise. In my first year on the job, I exceeded my revenue goal by 58%! I would love some advice on a recent interaction with my employer that turned ugly.
I was sort of ambushed at a meeting. My employer read to me this document that was a very demanding list (with excruciating detail) of things that I have to do to basically ‘prove myself’ over the next two months or they will recalculate my compensation.
Can they do this (i.e. simply change my compensation)? I appreciate your insights.
Obviously, there are things we don’t know about this situation. But I do think it’s worth asking the question, “Can my employer change my pay?” To help us understand the nuances, I asked Mark Neuberger with the firm of Foley & Lardner LLP. Mark has shared his knowledge with us before. One of my favorites is this post about the proper way to terminate someone.
And you know I mention this every time, but please don’t forget that Mark’s comments shouldn’t be construed as legal advice or as pertaining to any specific factual situations. If you have detailed questions, they should be addressed directly with your friendly neighborhood labor and employment attorney.
Mark, thanks for helping us. Because this reader is a salesperson, we don’t know if the change in compensation they’re talking about is base pay or bonus. So, let’s cover both. Can an employer change an employee’s base pay?
[Neuberger] If the employee is ‘at-will’, meaning they do not have a binding contract of employment, then in most instances an employer is free to adjust compensation but only on a going forward basis.
If the employee has a binding contract, that removes them from at-will status. In that case, the terms of the specific contract govern the relationship. Under a contract, a unilateral change of almost any type by the employer may be a breach of contract that would give the employee rights to sue to recoup the reduction.
How would an employee know if they at “at will” or have a contract?
[Neuberger] First you have to look at what the documents say, be it an offer of employment letter or something that looks like a contract. Then, you must also consult your particular state’s law. By way of example, in my home state of Florida, what differentiates at-will status from a contract is when the employer promises employment for a specific period of time (e.g. one or two years). That’s why it’s critically important for employment documents be carefully drafted to reflect the intent of the parties.
The second part is whether an employer can change an employee’s bonus plan. If performance was an issue, then wouldn’t the employee simply not make bonus?
[Neuberger] The answer to this question is essentially the same as the first. What an employer cannot do is allow an employee to make sales under a particular commission or bonus structure and then, after the sale is made, lower the formula i.e. retroactively.
Many states have what are called wage payment statutes and some states even have sales commission payment statues. A retroactive change would likely violate such a law. In many states, the penalties for an employer who violates one of these laws are quite onerous such as double or triple damages and attorneys’ fees to the winning employee.
If the company is changing one person’s compensation package, is there a risk (because they’re not changing everyone’s)?
[Neuberger] An employer is free to treat at-will employees differently even as to compensation so long as they don’t violate any one of the multitude of antidiscrimination laws. That is not to say treating a group of incumbents in the same or similar jobs on a totally random basis is ‘best practice’ because it is not.
Employers should remember there are a variety of legal theories whereby they can be found guilty of unintentional discrimination. Also, on the assumption that compensation and especially incentive compensation like bonuses and commissions are supposed to motivate higher performance, a random hodge-podge of pay practices will not achieve the ultimate goal of increasing sales.
This question has less to do with compensation and more with communication. If a company needs to make adjustments in their bonus plans, are there a couple of suggestions you can provide to help communicate the change?
[Neuberger] First, and most importantly, for the reasons noted above, do it in advance and never retroactively.
Second, make your plan/bonus/incentive formulas crystal clear and simple! I have seen management bonus and sales incentive plans that are so complex that a team of lawyers and accountants could not begin to agree on what a particular employee has earned. Unless the company and each employee completely understand how the formula works, the employer is inviting a law suit from a disgruntled employee who thinks they were not paid in accordance with the plan.
Last question. This reader isn’t asking about furloughs or layoffs, but given what’s going on right now, I’d like to ask a hypothetical. Can an employer adjust an employee’s pay when bringing them back from a furlough or layoff situation?
[Neuberger] If the employee is at-will, and consistent with my answers above, the answer to this question is YES. However, any employee must make the applicable minimum wage if they are non-exempt or the applicable minimum weekly salary if they are exempt.
Similarly, if the employer is claiming the inside sales or outside sale exemptions under the Fair Labor Standards Act (FLSA), they would have to comply with all of the rules for those exemptions. One exception to this would be in the case of an employee who is working under an H1-B visa, but that is one for another article.
A huge thanks to Mark for sharing his knowledge with us. Be sure to check out Foley’s Coronavirus Resource Center which contains information on developments associated with the COVID-19 outbreak, and various alerts and articles identifying best practices and other counsel and advice for these challenging times.
We keep saying that we’re living in unprecedented times. While I’m not saying that employers should change employee compensation, it’s possible that they might need to. Hopefully, it’s only a temporary situation. Remember, there’s a right way and a wrong way to do this.
Image captured by Sharlyn Lauby while exploring the streets of Fort Lauderdale, FL
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