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Employee of the month programs are used in a lot of large chain restaurants and hotels but you can also find them in small businesses. In those situations, they're probably hurting your bottom line.
It's not that rewarding employees for good work is a bad idea. People that feel appreciated are likely to work harder and be loyal which are important qualities for any employee. The problem is that the program creates a competitive environment which can lead to hostility towards the winners.
It can also easily lead to frustration with the company and trouble managing your workers. From there it could be the basis for a lawsuit.
Employee of the month rewards the best employee at a company but it's also an indirect punishment for the rest of the staff. That's especially true for workers who never see their name up on the wall.
In a good company the difference between employee of the month and everyone else is likely very little. But one person gets all the recognition and benefit in a very public way.
Often the employee of the month is given their recognition but staff aren't told why that person won. As a result winning the award can seem arbitrary and maybe unfair to equally qualified staff members.
That can lead to a lawsuit for discrimination.
Federal law prohibits employers from discriminating against employees for a number of things including gender, race, religion, marital status, and political affiliation. An employee can use evidence that certain employees received opportunities or awards while members of a protected class did not.
Your goal may not be discriminatory but without a clear reasoning, it could appear that way to employees. It may be hard to prove after the fact that all the winners were chosen based on the same merits if that wasn't clear up front.
This problem can be avoided by carefully monitoring the winners of an employee of the month program to make sure they don't appear discriminatory. It can also help to give reasons for each winner's award at the end of the month.
Even better would be to recognize employees for their efforts when they happen rather than praising one over all the others every month.