The Carrott

Excerpted from Tennessee Employment Law Letter, written by attorneys at the law firm Miller & Martin

To err is human, but carelessness can be contagious, and employee mistakes - from assembly errors to shipping snafus to paperwork pileups - can have a real impact on your bottom line. This week's Q&A offers some practical advice on how to get your employees to wake up and shape up without getting yourself in a legal bind.

Q: I'm concerned about the number of mistakes being made by our employees lately. Everyone from managers to production line workers is messing up, and it's costing us money. What can we do?

A: First of all, you need to get your employees' attention. Hold a meeting, or if that isn't practical, send out a companywide memo addressing the situation. Briefly describe the problem and the impact it has had on your business. Let employees know that solving those problems is going to be a top priority for the company. Then, lay out whatever policies you've decided to enact to address the situation. Of course, if yours is a union workplace, you'll need to make sure your new get-tough measures don't run afoul of any of the provisions of your collective bargaining agreements. In terms of the policies themselves, the best approach is to employ both a "carrot" to reward good performance and a "stick" to punish mistakes.

Q: So what would make a good "carrot"?

A: Try instituting an incentive bonus program on a weekly, monthly, or quarterly basis - or whatever basis you feel will be most effective and convenient. Probably because of the immediate and pressing nature of the problem, a general annual bonus isn't going to be enough incentive. You need a bonus specifically directed at eliminating mistakes, and it needs to be available on an immediate enough basis that it will have a real impact on employees' day-to-day performance.

For instance, you could institute a policy that if an employee makes no mistakes (and you'll need to define what you mean by that) during the bonus period, he'll be entitled to a certain amount of incentive pay. That could be a set amount or a percentage of his income for that period, whatever is easiest for you from a bookkeeping standpoint.

Q: Would a bonus program raise any issues under wage and hour laws?

A: Additional incentive pay will have no impact on exempt employees' status as long as you continue to pay them on a salary basis (if required by the applicable exemption) with no improper deductions. But you will have to count the incentive pay as part of your nonexempt employees' compensation for purposes of computing their regular rate and their overtime rate for the bonus period. Failing to do that will constitute a violation of the federal Fair Labor Standards Act.

Q: Can you give me an example of how that works?

A: First, you must determine the hourly value of the bonus for the bonus period. For instance, let's say you have a weekly bonus system for nonexempt employees. If an employee works 50 hours in a week and receives a $50 bonus for being mistake-free that week, the hourly value of his bonus will be $1 (the amount of the bonus divided by the number of hours worked during the bonus period). The employee must be paid half the hourly value of his bonus for all overtime hours he worked that week. So he will receive an additional $5 in overtime pay for that week because he received the bonus (10 overtime hours x .5 x $1 = $5). That same calculation can be used to cover a monthly or quarterly bonus period and will have to be done every time a bonus is paid to a nonexempt employee.

If you prefer to avoid the extra accounting duties, you could limit your bonus incentive program just to exempt employees. A limited bonus program would be perfectly permissible as long as you treat employees in the same categories or positions the same way. Another way to help reduce mistakes by nonexempt employees would be to provide incentives to managers to police the situation - for example, offering bonuses to managers whose subordinates are mistake-free during the bonus period.

The Stick

Q: Now that we've got the carrot, what do we do about the "stick"?

A: Like it or not, you must begin disciplining employees who make careless mistakes, up to and including firing them. You might try a "three strikes" policy to address performance issues: initial warning, final warning, discharge. If you want quicker results (but are also willing to move forward with some discharges fairly quickly), try a "two strikes" policy.

Whatever you decide, you must strictly and consistently enforce your policy for it to be effective. Don't play favorites - treat all employees in the same positions or categories the same way. For the sake of fairness, it's probably best to let everyone start off with a blank slate.

You might also consider conducting some refresher training after you announce your new policy. Perhaps you could hold a series of one-hour "workshops" or training sessions on the different issues you've had problems with. In addition to reminding your workers about the correct practices, training shows that you want to give them a fair chance to live up to your expectations. The fairness issue could become very important later if an employee who is disciplined or fired under your new policy files a discrimination charge or claim.

Q: Do we have to have the same rules for everyone? I can think of a couple of employees I've been waiting for an excuse to get rid of. Most of these folks, on the other hand, are basically good employees who just need a little kick in the you-know-what to get them back on track. And then there are a few employees I'd put up with no matter what because they have experience and special skills that would make them really tough to replace.

A: It's OK to adopt different disciplinary policies for managers or other exempt employees from those you apply to nonexempt employees. It may also be all right to treat nonexempt employees differently if you have a legitimate reason. For instance, it might be OK if employees in certain positions make frequent but fairly minor mistakes, whereas a single error made by someone in another position might have a devastating impact on the company. The key is to treat employees in the same positions or categories the same way under similar circumstances. To do otherwise (i.e., firing someone you don't like after the first mistake, but giving other employees several chances after making the same kind of mistake) will open you up to claims of discrimination.

Along those lines, be very careful to enforce your progressive discipline policy in a nondiscriminatory fashion. Make sure all employees in a particular category, regardless of their age, race, sex, gender, disability, religion, or national origin, are treated the same when they make the same kinds of mistakes.

Q: One idea we thought of to was to start docking the pay of anyone who makes a mistake. That would get their attention, right? Or what about posting the names of employees who make mistakes?

A: Docking your employees' pay would probably get their attention, but it might also draw unwanted attention - like scrutiny from the U.S. Department of Labor (DOL). If your practice of making any deductions from the pay of your exempt employees (except for mistakes having a major impact on workplace safety) is discovered, you'll lose the exemption for each position subject to deductions. That would mean you could end up having to pay overtime to all employees in the same exempt position (even if only one employee's pay was docked) for the previous three years, in addition to liquidated damages and attorneys' fees. The risk just isn't worth it, particularly when an incentive program coupled with a strictly enforced progressive discipline policy will likely have the same result.

Nor is it the best idea to use pay reductions to attempt to modify the behavior of your nonexempt employees. An example of that strategy would be requiring hourly or piece-rate employees to perform any work necessary to correct a mistake at a lower-than-usual rate. Although that practice isn't necessarily illegal as long as it doesn't violate a collective bargaining agreement or another employment contract, whatever corrective effect it has on employee performance probably isn't worth the bookkeeping complication.

To correctly compensate your nonexempt employees for overtime, you will still need to determine each employee's regular and overtime rate each week. That becomes something of a headache when you're compensating employees at different rates throughout the week. Also, when you dock the pay of a nonexempt employee, you must be careful not to take his hourly rate below minimum wage. An incentive program, training, and strictly enforced progressive discipline will likely have the same or a better result as pay reductions, with fewer complications and risk.

Finally, posting the names of employees who make mistakes could cause a serious morale problem. A strictly and fairly enforced progressive discipline policy will accomplish the same goal without publicly humiliating employees. Keep in mind that employees who feel they have been treated unfairly are much more likely to cause trouble for your company by initiating union activity, filing reports with the DOL or other agencies, or instigating lawsuits.

Copyright © 2005 M. Lee Smith Publishers LLC. This article is an excerpt from TENNESSEE EMPLOYMENT LAW LETTER. This newsletter does not attempt to offer solutions to individual problems but to provide information about current developments in Tennessee employment law. Questions about individual problems should be addressed to the attorney of your choice