Chapter Three

Contextual Influences on Compensation Practice

Figure 3-1

Employers’, Employees’, and Government’s Goals

Employers

EmployeesGovernment

Employment Discrimination

Employment discrimination—employment decision making or working conditions that are advantageous (or disadvantageous) to members of one group compared to members of another group

Most Frequently Used Sources of Redress

Federal laws» Title VII of the 1964 U.S. Civil Rights Act, as

amended in 1991—to prohibit discrimination based on race, color, religion, sex, or national origin

» Age Discrimination in Employment Act (ADEA) of 1967, as amended in 1978 and 1986—to prohibit discrimination against persons age 40 and older

» Americans with Disabilities Act of 1990 (ADA)—to prohibit discrimination against persons with disabilities

U.S. Equal Employment Opportunity Commission (EEOC)

EEOC—an agency of the U.S. Department of Labor created to monitor and enforce compliance with Title VII» files suits against organizations for violations of

the law» issues interpretive regulations regarding

employment practices» www.eeoc.gov has plenty of useful info!

What is Not Prohibited by Title VII? Discrimination based on the following even when

the use of such practices may be correlated with race, gender, color, religion, or national origin:» seniority systems» veterans’ preference rights» national security reasons» job qualifications based on test scores, backgrounds, or

experience

Bona fide occupational qualifications (BFOQs) or discriminatory practices whenever these practices are “reasonably necessary to the normal operation of the organization”

Testing your applied knowledge: EEOScenario: Sarah’s Surprise is a retail chain specializing in women’s lingerie. Sarah’s Surprise employs mostly female sale associates, but there are also some male employees in most stores. However, male employees are assigned to the back of the store, and are normally charged with stocking merchandise. Because sales associates work on commission, a male employee is complaining that his income can never match the one of his female coworkers, because he is not allowed to work on the sales floor. He is threatening to suit the store on the grounds of sex discrimination. Which of the following courses of action would you recommend to this company?

a. Open up 1/3rd of the sales positions to male candidates.b. Open up the sales positions to male candidates, but make sure there are enough female employees to help customers.c. Raise the base pay of stocking clerks. d. Argue that the sales position is a BFOQ that calls for female employees.

I want to make some money too!

Testing your applied knowledge: EEO

The following answers are correct:a. Open up 1/3rd of the sales positions to male candidates.b. Open up the sales positions to male candidates, but make sure there are enough female employees to help customers.c. Raise the base pay of stocking clerks. d. Argue that the sales position is a BFOQ that calls for female employees.Explanation. The company should be able to make a business case that, when it gets to women lingerie, having sufficient female salespeople helps, because many customers feel more comfortable buying women lingerie from other women. However, it’d be unreasonable to close the doors to all males, because customer preferences are not enough of a reason to declare a rigid BFOQ. Reserving 1/3rd of the positions for males would imply making gender a job requirement. Raising the base pay of stocking clerks ignores job worth and it may have a negative impact on pay structures.

I want to make some money too!

Theories Used in Title VII Cases

Disparate or differential treatment—plaintiffs must show that an employer treats one or more members of a protected group differently» burden on the plaintiff to prove that the employer

intended to discriminate because of race, sex, color, religion, or national origin

Theories Used in Title VII Cases

Disparate or adverse impact—plaintiffs must show that an employer’s practices had a disparate impact on members of the protected group by showing that the employment procedures (e.g., tests, interviews, credentials) had a disproportionately negative effect on members of a protected group» burden begins with the plaintiff showing evidence of adverse or

disparate impact (the 80% or 4/5ths rule).» burden shifts to the employer to produce evidence of “business

necessity” and job relatedness” for the employment practice» burden shifts back to the plaintiff who must show that an alternative

procedure is available that is equal to or better than the employer’s practice and has less adverse impact

Burden of Proof in Title VII Cases

defendantplaintiff

Burden of proof

Differential treatment

Adverse impact

Business necessity

Testing your applied knowledge: EEOScenario: A cable TV company is downsizing its operations nation-wide. The company is concerned that the downsizing effort may be challenged in court on the grounds that it is discriminatory. Which one(s) of the following courses of action would you recommend to this cable company?

a. Make sure to terminate about the same number of individuals from each gender and ethnic group.b. Before you terminate anyone, offer separation packages to those who wish to resign voluntarily. c. Terminate approximately similar proportions of individuals across race and gender groups.

Stay?Go?

Testing your applied knowledge: EEO

Stay?Go?

The following answers are correct:a. Make sure to terminate about the same number of individuals from each gender and ethnic group.b. Before you terminate anyone, offer separation packages to those who wish to resign voluntarily. c. Terminate approximately similar proportions of individuals across race and gender groups.

Explanation: The 80% or 4/5ths rule deals with ratios or proportions of employees, not with absolute numbers, which may be misleading due to differences in the number of individuals that exist in the various populations (e.g., minorities outnumber non-minorities in some areas). Offering separation packages eases the transition for those who lose their job, and it reduces the likelihood that disgruntled ex-employees may sue the company, but the best employees may leave –and the worst may stay!

Affirmative Action

Affirmative action—the extent to which employers make an effort through their personnel practices to attract, retain, and upgrade members of the protected classes of the 1964 Civil Rights Act or persons with disabilities» examples of affirmative action strategies:

– actively recruiting underrepresented groups in a firm– changing management and employee attitudes about various

protected groups– eliminating irrelevant employment practices that bar

protected groups from employment– granting preferential treatment to protected groups

Affirmative Action/Diversity Programs

Criteria for voluntary affirmative action plans must:» be designed to eradicate old patterns of discrimination» not impose an “absolute bar” to white advancement» be temporary» not “trammel the interests of white employees”» be designed to eliminate a “manifest racial imbalance”» show preference only from a pool of equally qualified

candidates Involuntary affirmative action plans may legally show

preferential treatment when the program:» is necessary to remedy “pervasive and egregious discrimination”» is used as a flexible benchmark for court monitoring, rather than as

quota» is temporary» does not “unnecessarily trammel the interest of white employees”

Testing your applied knowledge: Affirmative Action

Scenario: Occaluchee County wants to have an internal promotion in the road maintenance area. The AA plan includes increasing female representation in management by 20% in the next five years. The internal job announcement requires 5 years of road maintenance experience, plus a college degree (preferred). There are three candidates. Jane Road has 7 years of experience and a college degree. Joe Bitterways has a college degree and 11 years of experience. Jim Deadend has 20 years of experience, but no degree. In the panel interview, Jim Bitterways received a rating of 5 (5 = highly qualified), Jane Road received a 4, and Jim Deadend also a 4. Which decision(s) would you recommend to the county?

a. hire Mr. Bitterways, who is the highest scoring candidate.b. hire Ms. Road.c. have Mr. Bitterways and Ms. Road go through a 2nd interview. d. offer the job to Mr. Bitterways and, if he doesn’t take it, offer it to Mr. Deadend (being male is a BFOQ in road maintenance).

Joe?Jane? Jim?

Testing your applied knowledge: Affirmative Action

The correct answer is:

a. hire Mr. Bitterways, who is the highest scoring candidate.

b. hire Ms. Road.

c. have Mr. Bitterways and Ms. Road go through a 2nd interview.

d. offer the job to Mr. Bitterways and, if he doesn’t take it, offer it to Mr. Deadend (being male is a BFOQ in road maintenance).

Explanation: The differences in years of experience and interview ratings do not make these applicants significantly different from each other. The AA goal should allow the company to give preferential treatment to the female, especially if females were not represented among the interview panelists!

Joe?Jane? Jim?

Age Discrimination in Employment Act of 1967, Amended 1978 and

1986

Requirements for establishing a prima facie case of age discrimination are as follows:» the employee is a member of the protected age group (40

and older)» the employee has the ability to perform satisfactorily at some

absolute or relative level (e.g., relative to other employees involved in the decision process or at an absolute standard of acceptability)

» the employee was not hired, promoted, or compensated, or was discharged, laid off, or forced to retire

» the position was filled or maintained by a younger person (just younger, not necessarily under age 40)

Americans with Disabilities Act of 1990 (ADA)

1999 EEOC Policy Guidance on Reasonable Accommodation Under ADA suggests the following for assessing reasonable accommodation:» look at the particular job involved; determine its purpose and

its essential function» consult with the individual with the disability to identify

potential accommodations» if several accommodations are available, preference should

be given to the individual’s preferences

Table 3-6

Glass Ceiling Barriers: The Glass Ceiling Commission’s Major Findings (1 of 2)

Societal barriers that may be outside the direct control of business» The supply barrier related to educational opportunity and

attainment» The difference barrier as manifested in conscious and

unconscious stereotyping, prejudice, and bias related to gender, race, and ethnicity

Internal structural barriers within the direct control of business» Outreach and recruitment practices that do not seek out or

reach or recruit minorities and women» Corporate climates that alienate and isolate minorities and

women

Source: Fed. Glass Ceiling Commission, Good for business: Making full use of the nation’s human capital (Washington, D.C.: U.S. Government Printing Office, March, 1995).

Table 3-6

Glass Ceiling Barriers: The Glass Ceiling Commission’s Major Findings (2 of 2)

Internal structural barriers within the direct control of business (cont.)» Pipeline barriers that directly affect opportunity for

advancement (initial job placements, lack of mentoring, lack of management training, lack of career development, counter-productive behavior and harassment by colleagues)

Governmental barriers» Lack of vigorous, consistent monitoring and law enforcement» Weaknesses in the formulation and collection of employment-

related data that make it difficult to ascertain the status of groups at the managerial level and to disaggregate the data

» Inadequate reporting and dissemination of information relevant to glass ceiling issues

Expatriates and EEO Laws

The Civil Rights Act, the ADEA, and the ADA all have extraterritoriality which cover the following workers:» an American working for an American corporation

on foreign soil» resident aliens working for foreign companies on

U.S. soil, with some exceptions

What the Future Holds

Trends in EEO» increase in affirmative action litigation and legislation

– more state constitutional amendments or legislation– increasing number of class-action lawsuits likely

» increase in number of ADEA cases due to an aging workforce and the increasing proportion of workers who are over 39

» increase in number of companies seeking employment practices liability insurance

Position Average earnings

Women Men %Women %Men Store manager $89,300 $105,700 14% 86% Co-manager $56,300 $59,500     22.8% 77.2% Asst. manager $37,300 $39,800 35.7% 64.3% Mgt. trainee $22,400 $23,200 41.3% 58.7%Cashier $13,800 $14,500     92.5% 7.5%

Testing your applied knowledge: Pay Discrimination?

Consider the following salary figures for a retail chain. Based on these data, is this employer managing the risk of a discrimination lawsuit adequately?

a. Yes, the data show no adverse impact by gender.

b. No, the data show adverse impact by gender.

c. Can’t tell based on just these data

Position Average earnings

Women Men %Women %Men Store manager $89,300 $105,700 14% 86% Co-manager $56,300 $59,500     22.8% 77.2% Asst. manager $37,300 $39,800 35.7% 64.3% Mgt. trainee $22,400 $23,200 41.3% 58.7%Cashier $13,800 $14,500     92.5% 7.5%

Testing your applied knowledge: Pay Discrimination?

a. Yes, the data show no adverse impact by gender.

b. No, the data show adverse impact by gender.

c. Can’t tell based on just these data

Explanation: Without data on the number of applicants, it’s difficult to make a judgment. However, these data violate the 4/5ths or 80% rule, and therefore they may suffice to shift the burden of proof to the employer.

The Fair Labor Standards Act (FLSA)

Enacted in 1938 to buffer the effects of the Great Depression on workers.

Regulates overtime pay and its exemptions.

Regulates trainee status.

Table 3-2

Six Defining Factors of Trainee for the FLSA

The training, even though it includes actual operation of the employers’ facilities, is similar to that which would be provided in a vocational school.

The training is for the benefit of the trainee. The trainee does not displace regular employees but works under

closer supervision. The employer providing the training gains no immediate

advantage from the trainees’ activities; on occasion, the employer’s operation may in fact be hindered.

The trainee is not guaranteed a job at the completion of the training.

The employer and the trainee understand that the employer is not obligated to pay wages during the training period.

Source: J.E. Kalet, Primer on wage and hour laws (Washington, DC: Bureau of National Affairs, 1987).

FLSA

“White Collar” Exemptions- The FLSA exempts from its overtime provisions “any employee employed in a bona fide executive, administrative, professional or in the capacity of outside salesman” who is paid on a “salary basis.”

FLSA provides minimum standards. States may opt to exceed those standards

Recent Changes Include:

Eligibility For Exemption: Minimum salary level increased from $155 per week to $455 per week

New exemption for those who earn at least $100,000 annually

Long and short “duties” tests replaced with standard duties test, which focuses on primary duty now..

Executive employees must have authority to hire, fire, promote, or change employee status.

The “primary duty” requirement for exempt status has been changed to make clear that the emphasis is on the principal character of the job, and not the percentage of time spent performing the primary duty.

Recent Changes Include: (cont)

Broadened “artistic” exemption to include “creative” professionals.

Exemptions do not apply to “blue collar” workers.

Exemptions, generally, will not apply to public safety & health employees & other first responders.

Exemption to salary basis test:» Deductions for workplace misconduct

(must be in policy).» “Safe harbor” rule.

Tests To Determine Exempt Employees

Standard Duties Test» Applies to all employees

who earn between $455 per week ($23,660 annually) and $100,000 per year.

» The $455 per week may be translated into equivalent amounts for periods longer than one week.

» Guaranteed overtime if employees earns less than $455 per week ($23,660 annually) regardless of job duties.

Highly Compensated Employee Test» Total annual compensation at

least $100,000– Includes commission, non-

discretionary bonuses.– Does not include insurance

payments, retirement plans, fringe benefits.

» At least $455 per week paid on salary or fee basis

» Employee customarily and regularly performs one or more of the exempt duties of an executive, administrative or professional employee.

» Make-up payments

Determining Exemptions By Classifications (must meet the following criteria)

Executive Employees Salary $455 per week   Primary duty of the management

of the enterprise or a recognized department or subdivision. 

Customarily and regularly directs the work of two or more other employees. 

Has authority to hire or fire other employees (or recommendations as to hiring, firing, promotion or other change of status of other employees are given particular weight).

Administrative Employees Salary $455 per week Primary duty of performing

office or non-manual work directly related to management policies or general business operations of the employer or the employer’s customers. 

Customarily and regularly exercises discretion and independent judgment with respect to matters of significance (see slide 9).

Determining Exemptions By Classifications (cont.)

Learned Professional Employees

Salary $455 per week• Primary duty of performing office

or non-manual work requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction, but which also may be acquired by alternative means such as an equivalent combination of intellectual instruction and work experience.

• Consistently exercises discretion and judgment.

Creative Professional Employees

Salary $455 per week  Primary duty of performing

work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.

Determining Exemptions By Classifications (cont.)

Computer EmployeesSalary $455 per week or $27.63 an hour• Primary duty of (A) application of

systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional applications; or (B) design, development, documentation, analysis, creation, testing, or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications; or (C) design, documentation, testing, creation or modification of computer programs related to machine operating systems; or (D) a combination of duties described in (A), (B) and (C), the performance of which requires the same level of skills.

Outside Sales Employees

Salary None required for exempt status.

Primary duty of making sales; or of obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer.

• Customarily and regularly engaged away from the employer’s place or places of business.

Exercise of Discretion and Independent Judgment

(must meet at least 3 to be considered Exempt) Factors to consider in evaluating the exercise of discretion and independent judgment include, but are not limited to:a) Has the authority to formulate, affect, interpret, or implement management policies or operating practices;»b)      Carries out major assignments in conducting the operations of the business;»c)       Performs work that affects business operations to a substantial degree, even if the employee’s assignments are related to a particular the operations of the business.»d)      Has the authority to commit the employer in matters that have significant financial impact;»e)      Has the authority to waive or deviate from the established policies and procedures without prior approval;»f)        Has the authority to negotiate and bind the company on significant matters;»g)      Provides consultation or expert advice to management;»h)      Is involved in planning long or short term business objectives;»i)         Investigates and resolves matters of significance on behalf of management; and »j)        Represents the company in handling complaints, arbitrating disputes, or resolving grievances.

Testing your applied knowledge: FLSA

I wish I could pay you overtime, but…

Scenario: You are a manager working for a local bank. Your bank tellers are behind schedule, and you need to meet an important deadline next week. However, you have already exceeded your overtime budget for this year by 5%. Which one(s) of the following courses of action conform to the FLSA provisions?

a. Ask your employees to work extra hours and take the same no. of hrs in comp time instead of paid overtime.b. Ask for volunteers who are willing to work overtime and not receive overtime pay.c. Ask supervisors to stay late and complete the bank tellers’ work. d. Ask employees to work overtime at 1.5 times their regular compensation.

Testing your applied knowledge: FLSA

The correct answer is:a. Ask your employees to work extra hours and take the same no. of hrs. in comp time instead of paid overtime.b. Ask for volunteers who are willing to work overtime and not receive overtime pay.

c. Ask supervisors to stay late and complete the bank tellers’ work.d. Ask employees to work overtime at 1.5 times their regular compensation.Explanation: The FLSA was enacted to ensure that employees receive adequate compensation for overtime work; 1.5 times is the legal rate for overtime. Asking for volunteers to work without receiving overtime pay may backfire when these or other employees complain, and the company may be liable for back-pay plus interest! Supervisors are exempt because of the nature of their responsibilities; asking them to take over non-exempt jobs will run against the same reason they were made exempt, and thus they may claim overtime pay. Taking comp time in lieu of overtime is legally risky; at the very least, employees should be provided 1.5 hrs. for every hr. of overtime, and this should be a formal policy applied to everyone consistently.

I wish I could pay you overtime, but… Don’t!

Compensatory Time Under FLSA

Compensatory time off may sometimes be offered instead of cash overtime.

The rate is the same as for cash. Public employees can accumulate

compensatory time. In the private sector, the practice of allowing

compensatory time must be part of an established plan.

A St. Petersburg hospital was sued for overpayments that allegedly were not made to pharmacists who worked at the hospital. The hospital responded to the suit by stating that the pharmacists were exempt from overtime compensation as professional employees.

The suit was filed by David Mckenzie, one of the hospital pharmacists. After the case was filed, the parties engaged in discovery (or the pretrial exchange of facts). The hospital produced Mckenzie’s payroll and time records, which established that he had worked a total of 32.5 hours of overtime during the period in question. Although the hospital claimed that there was no violation of the FLSA, it offered to compensate him in full for all of his claimed overtime hours.

Case Study: Class-action lawsuit

Mckenzie v. Kindred Hospitals East LLC

Mckenzie accepted the offer but kept the lawsuit going by claiming that the other pharmacists also wanted to be included in the suit. He asked the court to designate the case as a class action and to notify potential employees of the opportunity to join the lawsuit. He also asked the court for an order compelling the hospital to produce a computer readable data file containing the names, addresses, social security and telephone numbers of other employees so that they could be notified and given a chance to join in.

The court denied that request, noting that Mckenzie had the burden to present evidence that other individuals were interested in joining the lawsuit and that none had been identified.

Case study(continued)

How much should the hospital offer to compensate for the unpaid overtime?

This pharmacist’s total overtime compensation was $552.33, and yet the company offered $1,200. Under wage and labor law, an employee can recover liquidated damages in an amount equal to his/her actual damages (unpaid wages). An employee can recover unpaid wages going back two years, and up to three years if s/he can prove that the employer’s violation was “willful.”

Most common violations of the FLSA involve:» misclassification of exempt status» working “off the clock”» using “comp time” instead of paying for

overtime» Inaccurate or incomplete record-keeping

Case study (continued)

Table 3-4

Compensable Activities That Precede and Follow Primary Work Activities

(Portal to Portal Act of 1947)

The time spent on the activity was for the employer’s benefit. The employer controlled the amount of time spent. The time involved is categorized as “suffered and permitted,”

meaning that the employer knew the employee was working on incidental tasks either before or after the scheduled tour of duty.

The time spent was requested by the employer. The time spent is an integral part of the employee’s principal

duties. The employer has a union contract with employees providing

such compensation, or, as a matter of custom or practice, the employer has compensated the activities in the past.

Testing your applied knowledge: Portal to Portal Act

Scenario: Upon arriving to work, a customer service agent takes between 10 and 15 minutes to organize his desk, boot the computer, test the headphones, microphone, and other equipment. His manager claims that 15 minutes is way too much time for these preparatory tasks. Which of the following actions would you recommend to this manager?

a. Inform the employee that you will not start paying him until he actually starts answering calls from customers.b. Ask the employee to clock in after he has already prepared and tested all the equipment.c. find out what is the average time that other customer service agents take to perform these preparatory tasks.d. give the employee a verbal warning

You better hurry up and start working!

Testing your applied knowledge: Portal to Portal Act

The correct answer is:a. Inform the employee that you will not start paying him until he actually starts answering customer calls.b. Ask the employee to clock in after he has already prepared and

tested all the equipment.c. find out what is the average time that other customer service agents take to perform these preparatory tasks.d. give the employee a verbal warning

Explanation: These are probably incidental tasks dealing with necessary preparation for work; therefore, they are compensable activities under the Portal to Portal Act. However, this employee may take excessive time on these incidental tasks. Finding out what the average time (and its range or standard deviation) needed for these incidental tasks would be necessary before such a determination can be made. If a performance problem were determined, a verbal warning would be justified.

You better hurry up and start working!

Table 3-1

Differences Between Annual Minimum Wage Earnings and Annual Poverty Thresholds for

Selected Years

YEARFED. MINIMUM

HOURLY WAGE

ANNUAL MINIMUMWAGE EARNINGS(hourly min. wage

x 40 hr/week x52 weeks)

AA

ANNUAL POVERTYTHRESHOLD

(family of three)BB

DIFFERENCEA - BA - B

19801986198919901992199419961998

$3.10$3.35$3.35$3.80$4.25$4.25$4.75$5.15

$6,448 $6,968 $6,968 $7,904 $8,840 $8,840 $9,880$10,712

$6,565$8,737$9,885

$10,419$11,186$11,542$12,156$12,750

-$ 117-$1,769-$2,917-$2,515-$2,346-$2,702-$2,276-$2,038

Source: US Dept. of Commerce, Statistical abstracts of the US, 119th ed. (Washington, DC: US Government Printing Office, 1999).

Table 3-5

U.S. Department of Labor Definitions of Compensable Factors

Source: U.S. Department of Labor, Equal pay for equal work under the Fair Labor Standards Act (Washington, D.C.: U.S. Government Printing Office, December 31, 1971).

FactorFactor

Skill

Effort

Responsibility

Workingconditions

DefinitionDefinition

Experience, training, education, and ability as measured by the performance requirements of a job

The amount of mental or physical effort expended in the performance of a job

The degree of accountability required in the performance of a job

The physical surroundings and hazards of a job, including dimensions such as inside versus outside work, heat, cold, and poor ventilation

Table 3-8

Average Weekly Earnings by Industry Group,

1980 to 1998

Mining

Construction

Manufacturing

Transportation, public utilities

Wholesale trade

Finance, insurance, real estate

Services

Retail Trade

1980

$397

$368

$289

$351

$267

$210

$191

$147

1985

$520

$464

$386

$450

$351

$289

$257

$175

1990

$603

$526

$442

$496

$411

$357

$319

$194

1995

$684

$587

$515

$557

$476

$442

$369

$221

1998

$744

$643

$563

$606

$538

$512

$420

$255

Source: U.S. Dept. of Commerce, Statistical abstracts of the United States, 119th ed. (Washington, D.C.: U.S. Government Printing Office, 1999).

INDUSTRY

A consulting company specializes in helping plaintiffs challenge the classification of “exempt” employees. This consulting company works with groups of employees who disagree with their employer’s decision to classify their jobs as “exempt.” These lawsuits usually asks for retro-active, unpaid overtime. What would be the procedure that this consulting company should follow to support the plaintiffs’ claim?What kinds of measures can employers take to prevent this kind of lawsuit?

Discussion Question 3-1