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Government and Legal Issues in

Compensation

Chapter

17

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1. Discuss the government’s role in the employment relationship and its interests in compensation decisions.

2. Identify the major provisions of the Fair Labor Standards Act and describe how this Act affects the regulation of pay.

3. Identify the key components of the Equal Pay Act of 1963 and explain how they affect wage discrimination.

4. Discuss how the two theories of discrimination under Title VII of the Civil Rights Act of 1964 (as amended) affect pay issues.

5. Explain the difficulties and issues in determining pay discrimination for dissimilar jobs.

6. Discuss the social implications of the earnings gap between men and women and among racial groups.

Learning ObjectivesAfter discussing Chapter 17, students

should be able to:

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Legislation establishes a minimum wage, governs overtime pay, protects

employees from discrimination, regulates benefits, and determines

how compensation is taxed.

Overview of Federal Regulations

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Government: Part of theEmployment Relationship

Government is a key stakeholder in compensation decision making

Governments’ usual interests are whetherProcedures for determining pay are fair (pay

discrimination)Safety nets for the unemployed and

disadvantaged are sufficient (minimum wage, unemployment insurance)

Employees are protected from exploitation (overtime pay, child labor)

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Exhibit 17.1: Evolving Nature ofUnited States Federal Pay Laws

Davis Bacon Act (1931)Copeland Act (1934)Walsh-Healey Act (1936)Fair Labor Standards Act (FLSA) (1938)Equal Pay Act (1963)Title VII of Civil Rights Act (1964)Service Contract Act (1965)Age Discrimination Act (1967)Wage Garnishment Law (1968)

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Fair Credit Reporting Act (1970)Pregnancy Discrimination Act (1978)Americans with Disabilities Act (1990)Civil Rights Act (1991)Family and Medical Leave Act (1993)Health Insurance Portability and Accountability Act (HIPPA) (1996)

Small Business Job Protection Act (1996)Mental Health Act (1997)

Exhibit 17.1: Evolving Nature ofUnited States Federal Pay Laws

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Fair Labor Standards Act (1938)

Minimum wage

Hours of work

Overtime pay

Employee status Exempt

Nonexempt

Child labor

Three Major Provisions

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Minimum Wage

Legislation is intended to provide an income floor for workers in society’s least productive jobsFederal minimum wage is $5.15

an hour (set in 1997)Almost all states have their own minimum wage to cover jobs omitted from federal legislation

If state and federallegislation cover samejob, the higher rate prevails

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Minimum Wage Under FLSAMinimum Wage Under FLSA

1938 $0.25 per hour 1978 $2.65 per hour 1979 $2.90 per hour 1981 $3.35 per hour 1990 $3.80 per hour 1991 $4.25 per hour 1997 $5.15 per hour

1938 $0.25 per hour 1978 $2.65 per hour 1979 $2.90 per hour 1981 $3.35 per hour 1990 $3.80 per hour 1991 $4.25 per hour 1997 $5.15 per hour

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Effects of Minimum Wage RateIncreases on Wage Structure

Direct and indirect effectsDirect effect – Refers to increase in wages for

jobs at bottom of wage curve that have been below minimum wage

Indirect effect – Refers to changes in remainder of the wage curve to maintain appropriate differentials for jobs that deserve higher pay

Analysis indicates indirect effect is usually greater than direct effect

Companies spend more money on increasing pay of high-level jobs than they spend on raising pay of low-level jobs to new minimum

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Employee Status Under FLSA

When classified as an employee, an organization mustWithhold federal/state/local income taxesMatch Social Security/Medicare withholdingInclude person in company benefit programsPay for unemployment insurance and

workers’ compensationAllow up to 12 weeks of unpaid leave for

family emergencies (after one year of service)

Provide any other state or federally mandated benefits

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Contractor Status Under FLSA

To be classified as a contractor, a person mustHave ability to set own hours and determine

sequence of workWork off-siteWork by the project rather than have a

continuous relationship with the employerBe paid by the jobHave an opportunity for profit and lossFurnish own tools and trainingBe self-employed or work with a leasing

company

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Exempt and Non-ExemptStatus Under FLSA

Non-exempt employees are included in FLSA regulations and have full protection of law

Exempt employees are excluded from FLSA minimum wage and overtime provisions

Four classifications of exempt employeesExecutivesProfessionalsAdministrative employeesOutside salespeople

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Non-exempt workers must be paid 1.5 times their regular rate of pay for hours worked in excess of 40 in any workweek

Regular rate of pay includes base pay plus

Non-discretionary bonuses

Shift premiums Production

bonuses Commissions

Overtime is paid on time worked, not time compensated

A workweek is any fixed, recurring period of 168 consecutive hours

2004

FLSA Basic Overtime Provisions

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Compensatory Time Under FLSA

Compensatory time off may sometimes be offered instead of cash overtime

Rate is the same as for cash

Public employees can accumulate compensatory time

In private sector, practice of allowing compensatory time must be part of an established plan

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Child Labor Provisions

FLSA restricts hours and conditions of employment for minors

Persons under 18 cannot work in hazardous jobs

Persons under 16 cannot beemployed in jobs involvinginterstate commerce

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FLSA Compliance: Enforcement.

Wage and Hour Division of U.S. Department of Labor enforces FLSA minimum wage and overtime provisions

Equal Employment Opportunity Commission (EEOC) enforces equal pay provisions

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When State Laws Differ

Pay frequency, minimum wage, severance or vacation pay, or unclaimed wages may be governed by individual states

Rule of thumb - Whenever state and federal laws differ, follow regulation that most benefits employees

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Pay Discrimination: What Is It?

Law recognizes two types of discriminationAccess discrimination – denies particular

jobs, promotions, or training opportunities to qualified women or minorities

Valuation discrimination – looks at pay women and men receive for the jobs they perform It is discriminatory to pay minorities or women

less than males when performing equal work - working side-by-side, in the same plant, doing the same work, producing the same results

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Types of Antidiscrimination Acts

Equal Pay Act (1963)

Civil Rights Act (1964)

Age Discrimination in Employment Act (1967)

Wage Garnishment Act (1968)

Americans with Disabilities Act (1990)

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Types of compensation practices which may be discriminatory

Extra pay plans

Leave policies

Maternity leave

Pension policies

Discriminatory Compensation Practices

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Equal Pay Act (1963)

Prohibits wage discrimination on the basis of gender when

Employees perform work inthe same establishment, or

Employees perform jobsrequiring equal skill, effort,and responsibility undersimilar working conditions

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A plaintiff would have a prima facie case if he/she received a lower wage than members of opposite sex for performing work that requires substantially the same skills, effort, and responsibilities under similar working conditions - all performed at the same location.

What Is Discrimination Under EPA?

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Provisions of Equal Pay Act

Equal work is defined in terms of Skill, effort, responsibility, and working conditions

all performed at the same locationDifferences in pay are legal if differences

are based on any one of four criteria Seniority, merit or quality of performance, quality

or quantity of production, or some factor other than sex

Not permitted are defenses such as Union rules or the wage is prevailing pay for market

Time of day does not constitute dissimilar working conditions

However, if a differential for working at night is paid, it must be separated from base wage for job

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Title VII of the Civil Rights Act (1964)

Prohibits discrimination in all terms and conditions of employment on the basis of race, religion, ethnic group, sex, or national origin.

Defines two theories ofdiscrimination behaviorDisparate treatment

Disparate impact

Civil Rights Act of 1991 reinforcedthese two standards of discrimination

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Theories of Discrimination

Disparate treatment

Occurs when an employee who is a member of a protected group is intentionally paid less

Disparate impact

Occurs when an apparentlyneutral compensation practiceresults in unintentional wagediscrimination for a protected group

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Pay Discrimination and Dissimilar Jobs

Gunther v. County of Washington

Supreme Court determined pay differences for dissimilar jobs may reflect discrimination

Proof of discrimination

Use of market data

Spaulding v. University of Washington

Jobs of “comparable worth”

AFSCME v. State of Washington

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Differencesin Pay

Differencesin Pay

Differencesin

employees

Differencesin

employees

Differencesin

unions

Differencesin

unions

Differencesin labor market

conditions

Differencesin labor market

conditions

DiscriminationDiscriminationDifferences

inwork

Differencesin

work

Differences in employee

work behaviors

Differences in employee

work behaviors

Differencesin

firms

Differencesin

firms

Exhibit 17.6: PossibleDeterminants of Pay Differences

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What Is Comparable Worth?

If jobs require comparable skill, effort, and

responsibility, the pay must be comparable, no

matter how dissimilar the job content may be.

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Comparable Worth

Establishing a comparable worth plan involves the following four basic stepsAdopt a single job evaluation plan for all jobs

within a unitAll jobs with equal job evaluation results

should be paid the sameIdentify general representation (percentage

male and female employees) in each job group

The wage-to-job evaluation point ratio should be based on the wages paid for male-dominated jobs since they are presumed to be free of pay discrimination