Deductions from Salary to Recover Bonus Overpayment Renders Employees Nonexempt
Tackling the question of whether an employer may deduct errant bonus overpayments from the base salary of exempt employees, the U.S. Court of Appeals for the Sixth Circuit held, in Baden-Winterwood v. Life Time Fitness, Inc., 566 F.3d 618 (6th Cir. 2009), that actual deductions for mistaken bonus payments violate the salary-basis test and therefore vitiate the otherwise applicable overtime exemption under the Fair Labor Standards Act (FLSA).
Life Time Fitness, Inc. paid its exempt senior management staff on a salary basis with regular semi-monthly pay periods. These employees were also eligible for monthly bonus payments based on their year-to-date performance in accordance with certain corporate guidelines.
However, on January 1, 2004, Life Time Fitness altered its corporate bonus pay plan to reserve the right to reclaim advance bonus payments from an employee's base salary, if the employee's year-to-date performance dropped below a certain level. Life Time Fitness broadened its right to recoup advance bonus payments on January 1, 2005, amending the bonus pay plan so that the company could deduct the amount of such payments from an employee's base salary if the employee's performance dropped so much that the amount of the advance bonus payments exceeded the amount actually earned. Although no employees had their base salary payments reduced in 2004, Life Time Fitness reduced the base salary payments of eight employees over three pay periods in November and December of 2005.