Key Employee – Definition, Rules & Warnings

A key employee is a member of staff who has a significant amount of proprietorship or authority in the company. They are often very well paid, whether in terms of money, perks, or a combination of the two. As an additional incentive to both join the business and remain with the organization, key workers are lured by additional performance compensation and benefits as well.

Identifying and Understanding Key Employees

  • The Internal Revenue Service (IRS) also referred to prominent employees by this designation. This word is used by the Internal Revenue Service to refer to company-sponsored defined contribution retirement plans.

  • It is an employee who owns more than 5% of the company.

  • An individual who owns more than one percent of the company's stock.

  • It is also about an employee who receives yearly pay in excess of a particular amount.

How is Business Impacted by Key Employees?

Apart from the Internal Revenue Service categorization, major employees are often considered as integral parts of the organization. They form the main crux of daily operations and take all the major decisions and have a significant influence in raising finances through their contacts, fund raising or by performance of their job.

Key Points Briefly

  • Key workers are often seen as being the main aspect for the success of a company's operations.

  • Key employees may be eligible for financial perks as well as other incentives.

  • The compensation packages for the key employees are vastly different from other members of the organization.

Key Employee Example

Let us consider the example of an employee Jack, who happens to be the company’s best performing salesman for the previous year. He then gets assigned to a job that could impact the company’s cash registers directly. Company’s regular income generation would be influenced by Jack’ performance and his sales.

He becomes the financial and public relations image face of the organization as well, representing the brand and generating interest and creating more revenue from customers. For this reason, Jack will become the Key Employee of his firm and will enjoy special perks and higher salary when compared to other staff.

Another example could be from the field of academia, where a lead scientist is working with a team on creating a new breakthrough product for his company. This scientist becomes the key employee as he would be responsible for developing the product that would generate sales and be the brand image.

What must be the Employers be aware of?

Apart from the wages to key employees, companies often feel the pressure to provide such executive with more privileges and perks. This includes a wide variety of stock portfolio to choose from, providing them with paid luxury holidays, complete medical coverage, and a comprehensive retirement plan to lure them in the company.

However, the key employees could take unpaid leave under the Family and Medical Leave Act, and the firm might then take a different positioning. The highest paid employees may not be allowed to be reinstated on job under some peculiar circumstances.

Updated on: 28-Jul-2021


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