Title-Only Promotions: How to Stay out of Legal Trouble

It's a situation that is playing out at businesses of all sizes across the country due to the lagging economy: title-only promotions.

Experts say that cash-strapped companies are increasingly rewarding employees for their strong work ethic and performance with a change in title, but no bump in pay. While this may be a morale booster for the worker, small business owners can find themselves in legal hot water for giving promotions without any monetary benefits, according to experts.

Paul Lopez, chair of the Litigation Department at Tripp Scott attorneys, said the recession has forced employers to think of out-of-the-box ways to reward their employees.

"It's not only about keeping employees retained," Lopez said. "Employees are worried and nervous—this is a nice way to try and improve morale by rewarding them with a title. It's not a real, true raise, in the sense of money, but companies are trying to be creative."

While it's not against the law to promote an employee without an accompanying raise, Lopez said companies need to make it clear to employees the reason why they are not being given monetary compensation.

"Make clear to employees that there is a temporary freeze on monetary raises, but don't let it be open ended," he said. "Explain why this is happening now versus three years ago. Make sure it's explained, transparent and communicated that this is a temporary thing."

While  employers can leave the door open for a potential raise in the future, they shouldn’t promise anything.

"You don't want to be making promises that can get you into trouble," said Elizabeth Milito, senior executive counsel for the National Federation of Independent Business. "If you make pay promises to employees, they can file a labor claim alleging back wages."

Lopez said the best way to avoid a legal pitfall in this situation is to flesh out with human resources an analysis of who has and has not received raises with promotions and why. Keeping track of the demographics of who is being promoted offers protection against a potential discrimination suit.

"The HR department will be the eyes and ears of what the employee feels," he said. "If they are upset, or feel they have been slighted, HR will know about it. You have to be proactive and beat them to HR."

Also, ensure the employee is properly classified by the Department of Labor's standards and the Fair Labor Standards Act with his or her new promotion. Workers must meet certain job description standards to be considered hourly or salary workers, making them exempt or non-exempt from being paid overtime, according to Lopez.

"If you give them a promotion and put the label on them of 'manager' but they aren't managing or supervising anyone, that can be a terrible thing," he said. "If you are treating them as 'exempt' but they don't have 'exempt responsibilities' you may have a lawsuit on your hands."

Milito said another way to avoid falling into legal trouble by giving a title-only promotion would be to package the promotion with other work-related incentives, such as a bonus around the holidays, increased vacation time, or a matching education program.

"Employers should think about what the additional duties or responsibilities will be for the worker, but there are certainly other ways to reward employees outside of the paycheck," said Milito. "Salary usually makes up only about 70% of an employee's compensation."

However, even if you do plan on re-evaluating the worker's salary when the economy improves, that is not something you should put in writing or promise to the employee, Milito said.