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Best Practices: Employee Compensation

Let’s face it, every employee wants to be fairly compensated for the work he or she performs. And when it comes to paying employees, employers are tasked with more than simply issuing a check for the proper amount at the end of the pay period. To comply with federal and state laws and regulations, we have developed these best practices for compensating employees.

We encourage our clients to establish and follow a written compensation policy. The policy should address all the potential factors used in the employer’s compensation decisions. Make sure the policy reflects your company goals, includes a non-discrimination statement, and allows for exceptions, pay decreases and red circling.

Compensation decisions must be based on non-discriminatory factors. Performance and experience are good places to start. In any event, the factors you rely upon must be consistently applied and fully explain the reason for any pay differential.

Apply all of the factors set forth in the compensation policy. If a factor does not apply to a particular employee, say so instead of ignoring it. For example, if employees are normally required to make 25 sales calls per month, but these requirements did not apply to Employee A for a given month because she was busy training new hires, mention this on the review. Remember, not following a policy is worse than not having a policy at all.

Get specific. Explain the reasons for each compensation decision to employees. The explanation should provide the employee with an honest assessment as to how the employee’s job performance factored into the employee’s new salary. We recommend conducting a legal audit of your compensation policy. The audit will examine whether unintentional discrimination affects pay decisions and examine whether there are unexplainable statistical disparities. Supervision of this study by counsel (when done for the purpose of providing legal advice) will protect the report from disclosure in litigation (i.e., attorney-client privilege).
Don’t compare apples to oranges: compare employees who perform the same job. If compensation decisions are made by comparing the relative performance of employees, any legal analysis will examine the work actually performed, not the characteristics of the employee who holds the job. Of course, the relative experience or performance may be used to justify any salary disparity.

Let our labor and employment lawyers assist you in navigating these important compensation issues. If your business employs individuals who receive tips as part of their compensation, be sure to check out our Best Practices: Compensating Tipped Employees.

To speak with one of our attorneys about your particular legal issue, call Kramer Rayson LLP at 865-525-5134 or contact us online. With offices in Knoxville and Oak Ridge, we regularly serve clients throughout the state and beyond.

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