Mar. 2, 2012

The Risks of Promoting Without Giving Raises

Cash is king, especially during difficult economic times. More and more business owners are thinking out of the box when it comes to trying to keep morale up in the workplace.

Promotions are an obvious way to try to boost morale, especially among key employees who generally are happy to have increased duties and status.

But how can you afford to do so when there is no extra money to provide raises? What if your revenues are way down, yet you cannot afford to lose your key people to the competition?

One of the ways some business owners are tackling this dilemma is to promote key employees, but not give them raises connected to their promotions.

There is certainly nothing illegal or inappropriate about this practice. It seems to be growing during these uncertain economic times.

Only 48% of small-business owners said they increased employee compensation during the previous 12 months, in a recent online poll of 450 members of the National Small Business Association. That's the highest it's been since August 2008, when the figure was 51%.

If this is the first time you have implemented this practice of so-called "title-only" promotions, there are a few issues to consider.

First, it makes sense review the demographics of the prior employees in recent years who were promoted with raises, then compare them to the employees you're considering promoting without a raise.

Suppose, for instance, that two years ago a white male employee was elevated from being an hourly worker to a salaried manager and received a raise. Now, this year an African-American female employee is going to be similarly promoted with no raise. You better be prepared to explain the business rationale for this decision.

If the business environment has gotten worse, that perhaps can explain the different treatment. But if your business is simply stagnant with no growth, a creative plaintiff's lawyer might make a case for discrimination. That case could be made based on the fact that since nothing has changed, the African-American female employee should be treated the same as white male employees was a few years back.

Of course, there may be legitimate non-discriminatory business reasons for the different treatment. But the point is that you should be prepared to articulate those reasons to avoid being unnecessarily exposed to these arguments.

What's more, it is important for you to communicate why no raises are forthcoming even though your employees are promoted—whether that's because your industry overall is down, or whether because there are specific issues in your company that have caused a slowdown, such as losing a key contract or customer, or because a big client hasn't paid its bills.

This will not only make the employees feel as if they are truly a part of your team but, importantly, if and when the employees are asked about the salary freeze they will be in a position to tell anyone asking—including a plaintiff's lawyer-- the legitimate reasons why.

That's certainly better than the employee being in the dark and perhaps suspicious of the reasons, and then voicing those suspicions to inquiring minds.

You should also put a time frame on the freeze, creating a clear timeline for when you will reevaluate your position. Whether in three months, six months or even a year. Your employee should know where he or she stands relative to potentially being rewarded for increased responsibilities.

The last thing you want is to have an employee who was promoted to start feeling as if though they have been taken advantage of, because morale then goes down

Finally, remember that you also need to be wary of overtime considerations under the Fair Labor Standards Act when promoting employees and not providing raises.

Often times, when a business owner promotes an hourly employee into a "management" position and converts the employee's pay structure hourly to salary, he or she presumes that the employee is not entitled to overtime compensation. This is not necessarily so.

ABOUT THE AUTHOR

Paul O. Lopez is a director with Tripp Scott, a Fort Lauderdale, Fla., law firm serving entrepreneurs. He also chairs the firm's litigation department.

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