A company plan to recover bonus “overpayments” from the salaries of exempt employees does not meet the salary basis test of the Fair Labor Standards Act, the Sixth Circuit rules, thus the employees were entitled to overtime payments.

The corporate plan in the case had specified that the company reserved the right to make deductions from exempt employee’s base salaries for bonus payments made if certain performance goals were not met. The affected employees subsequently claimed that they were misclassified as exempt employees because the plan violated the FLSA salary-basis test, under which exempt pay cannot be subject to reduction “because of variations in the quality or quantity” of work.

Although the company argued that the deductions were made to “recoup overpayment,” which is allowed under DOL opinion for advances or loans, the Sixth Circuit disagrees that the advance bonus payments were loans. The company “knowingly made salary deductions as part of a pre-designed bonus compensation plan,” the Court observes, adding: “The deductions were not made to recover irregular salary advances or payments mistakenly made by the payroll department… there is no support for the contention that the FLSA allows for the reduction of guaranteed pay under a purposeful, incentive-driven bonus compensation plan.” Baden-Winterwood, et al. v. Life Time Fitness, Inc.